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Joint Committee of Inquiry into the Banking Crisis debate -
Wednesday, 9 Sep 2015

Nexus Phase

PricewaterhouseCoopers - Mr. Denis O’Connor and Mr. Aidan Walsh

As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session. Is that agreed? Agreed. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. We begin today's session 1 of our public hearings with Mr. Denis O'Connor and Mr. Aidan Walsh, partners, advisory services, PwC. In doing so, I would like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis, and at our first session this morning, we will hear from witnesses from PricewaterhouseCoopers.

Mr. Denis O'Connor and Mr. Aidan Walsh are partners in PwC. Both Mr. O'Connor and Mr. Walsh were key figures in the preparation of the PwC Atlas reports and reviews on Irish financial institutions for the IFSRA. Mr. O'Connor and Mr. Walsh, you're very welcome before the committee today.

Before hearing from the witnesses, I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witnesses have been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to both Mr. O'Connor and Mr. Walsh, please.

The following witnesses were sworn in by the Clerk to the Committee:
Mr. Denis O'Connor, Partner, Advisory Service, PricewaterhouseCoopers.
Mr. Aidan Walsh, Partner, Advisory Service, PricewaterhouseCoopers.

Now once again, Mr. O'Connor and Mr. Walsh, welcome this morning and if I can invite you, in whichever order you like, to make your opening remarks to the committee, please.

Mr. Denis O'Connor

Thank you, Chairman, and members of the inquiry team. I am pleased to be here today with my colleague, Aidan Walsh. We were the partners leading the PwC work on Project Atlas from late September 2008 until January 2009. I was the main point of contact with IFSRA and the Department of Finance during our assignment. We have been requested to provide evidence in two key lines of inquiry - the role of advisers in analysing the crisis and, two, the effectiveness of reviews of the bank loan books and capital adequacy.

By way of background, PwC were retained by the IFSRA on 18 September 2008. Mr. Walsh and I met the Financial Regulator on that day. Mr. Neary explained to us that he needed urgent assistance to look at the liquidity position and the credit quality of a number of Irish banks. He explained that he would need us to carry out our work in a short period of time. Following our meeting, we exchanged a proposed scope of work and an engagement letter.

We commenced our work on Anglo Irish Bank on the following day, 19 September. Over the following number of days, our engagement was extended to include Irish Life and Permanent and Irish Nationwide Building Society. The original focus of our work was mainly on liquidity, as some of the banks were losing significant amounts of deposits and running out of money. We attended part of a meeting at the NTMA on 28 September, where we discussed the findings of our work over the previous eight or nine days. This work was focused mainly on liquidity and the level of provisions that existed in the banks' management accounts at the end of August 2008. Following on that ... following on from that, we issued an e-mail summarising the information shared at that meeting.

Apart from two e-mails discussing the deposit outflows on 29 September and the deposit inflows on 30 September, we had no other meetings or contact with IFSRA, the Department of Finance or the NTMA from 28 September until 6 October. On that date, we met the Financial Regulator in his office to discuss the work we had performed on the top 20 borrowers within each bank. We had not been involved in any discussions around the guarantee or any alternative options being discussed at that time. Our reports on Atlas 1 were discussed for the first time on the second week of October.

Following a meeting with the regulator on 8 October 2008, the Atlas 1 exercise was extended to cover all six banks and to increase the sample of the top 20 loans to the top 50 loans and the top 25 land and development loans. This Atlas 2 was a significant exercise and involved placing a large team from PwC in each bank for approximately five weeks, with us reporting to the regulator on 17 November, approximately six weeks after the guarantee had been announced.

Our work involved us reviewing lots of loan files and interviewing senior management in each of the banks, with particular emphasis on lending and credit areas. The scope of our work did not include reviews of smaller developers or any element of actual mortgage lending. Our reports highlighted the very large exposures that the banks had to a small number of developers and the very high level of asset concentration in property. The top ten borrowers had loans of €17.7 billion with the six guaranteed banks and that was before any additional borrowings they had in Ulster Bank or Bank of Scotland Ireland.

The Atlas 2 reports also included, for illustrative purposes, a number of scenarios shown to impact on tier 1 capital of write-downs in various asset categories. Following discussions on the findings of Atlas 2, the regulator requested that we undertake more work on the top 75 land and development loans. We referred to this as Atlas 3. We were to engage a property valuer to assist us with this work and JLL were engaged in mid-November 2008. They were asked to focus on problem commercial real estate loans and to carry out a review of the bank's valuation of the underlying properties based on an actual medium-term view of potential future value. JLL reported their findings on 17 December 2008.

We have submitted statements to the inquiry team dealing with the nature and scope of the work we were asked to carry out. As the committee is aware, we are restricted by Central Bank legislation as to what we can say about certain confidential information that we received during our work. Subject to these constraints, I look forward to being as forthcoming as possible in answering any questions you may have. I will now hand you over to my colleague, Aidan Walsh.

Thank you, Mr. O'Connor. Mr. Walsh.

Mr. Aidan Walsh

Thank you, Chairman and members of the committee. I am pleased to be here today with my colleague, Mr. Denis O'Connor. As he has stated, we have been requested to provide evidence to the committee on two lines of inquiry - the role of advisers in analysing the crisis and the effectiveness of reviews of bank loan books and capital adequacy.

I also attended the meeting with Mr. Neary, the Financial Regulator, on 18 September which Denis has referred to in his opening statement. This meeting took place following the collapse of Lehman Brothers the previous weekend and the severe constraints that were being experienced on an international basis in the interbank and wholesale money markets. As Denis has stated, following our meeting we agreed a specific scope of work and engagement letter. We deployed separate teams to each bank. In the first week of our work we focused, as agreed, on the movements in deposits into and out of the banks and in compiling information on the top 20 borrowers by jurisdiction in which the banks operated. Management at the banks were co-operative and shared management and accounting information with us. It was clear that the liquidity positions were deteriorating on a weekly and daily basis and interbank and corporate deposits were not being rolled over and where they were, the deposit periods were reducing significantly.

We both attended part of a meeting at the National Treasury Management Agency on Sunday, 28 September. There were participants from IFSRA, the Central Bank, the Department of Finance, the NTMA and from Merrill Lynch, who were the financial advisers to the Government. We did not have a draft report prepared for that meeting. We shared information we had collected on the rapidly declining liquidity and the substantial cash deficits that were forecast by the banks to arise in the very near term. We also shared information on a summary of the loan books at the three banks, the value of loans that were reported as impaired and the value of loan provisions that were booked. We had not done any substantive work on credit quality at this stage, just nine days into a complex assignment. Our next meeting, to discuss draft reports with the Financial Regulator and his staff, was on Monday, 6 October, a week after the bank guarantee had been announced.

As Denis has stated, we were instructed on 8 October to commence work on what was known as Atlas 2. The results of our Atlas 2 work was reported to the Financial Regulator and the Department of Finance in mid-November 2008, roughly six weeks after the bank guarantee had been announced. The primary focus of this report was, as agreed, on the top lending positions. It also included the results of stress tests that had been run by each of the banks on their capital adequacy ratios, and based on their own assessments of the probable emergence of future loan losses. In addition, PwC included two additional scenarios based on higher levels of future loan losses, called scenario 1 and scenario 2. The assumptions for these scenarios were developed in conjunction with officials from IFSRA, the Central Bank, Department of Finance and NTMA. As is clearly stated in the report, these scenarios were for illustrative purposes only, to show the sensitivity of the banks to future losses in these two scenarios. Our work was not intended to be a comprehensive assessment of the most likely outcome for future losses. It is also important to note that within the timescale that we were working to, Atlas 2 did not include any third-party evaluation of property values, nor did it include a review of the security documentation supporting the loans.

Work on Atlas 3 then followed. JLL's work was carried out independently of our loan reviews. JLL were given details of the properties comprising the collateral for the loans, but the loan details were not shared with JLL. The property values were tested based on a long-term outlook for property values, which was formulated by JLL. The collateral values were not marked to estimated current market value at the time of the review, as there were no ... as there was no liquidity in the market and the market could not absorb a wholesale transfer of property. The results of the JLL work were consistent with the indicative future losses calculated under scenarios 1 and 2 as part of the Atlas 2 analysis. Mr. O'Connor and I shared responsibility for the work which PwC carried out for IFSRA in the period from 18 September 2008 to early January on the assignments that we have code-named "Atlas". I too am subject to statutory obligations which prevent me from discussing confidential information which we obtained as part of our engagement on the Atlas reports. However, I also aim to be as forthcoming as possible and of as much assistance as I can be to the committee in relation to the two themes which we have been asked to address. Thank you.

Thank you very much, Mr. Walsh, and we'll get questioning under way, and in doing so, if I can invite Senator Sean Barrett. Senator, you've 25 minutes.

Thank you very much, Chairman, and welcome to Mr. O'Connor and Mr. Walsh. I echo the Chairman's earlier welcome to you. In your statement, you state that PwC's role in many of these meetings was to obtain, analyse and summarise information from the banks. What was the response to PwC on liquidity, loan exposure and provision of assessments to ... from the other participants on the 28 September meeting?

Mr. Denis O'Connor

Okay, I will start this. On liquidity, the bulk of our work at that stage was done on liquidity. As you probably are aware, the ... as deposits were up for maturity on the banks, they were ... they were not being rolled over, so a number of Irish banks had significant liquidity issues, particularly coming up at the end of September, which was the quarter end or half-year end in some of the cases. So the information that we had compiled over the previous number of days from the banks' records emphasised to the regulator - and they were participants in the meeting - that this was a big issue and a contingency plan would have to be put in place ASAP. We were looking at a good few ... into €8 billion or €10 billion outflows in a number of days, and that was happening at the end ... in three days' time.

And how did they react, Mr. O'Connor, when you informed them of your opinion?

Mr. Denis O'Connor

They were aware of the ... that the issue was out there, but when they saw it coming from a third-party independent, they knew there was ... that the numbers were, were accurate.

Because you only had - what nine days, wasn't it - to come up with all that information? I think you said the first meeting was on 19 September and you ... and you reported back to them on the-----

Mr. Denis O'Connor

That is-----

-----on the 28th.

Mr. Denis O'Connor

That is correct, Senator, but on liquidity the numbers were easy to obtain.

And, I mean, we would've had in earlier evidence concerns about the St. Patrick’s Day massacre and, you know, knowledge about the CFD purchases and so on, so I’m really trying to find, you know, did they need you to confirm what they already knew or were they surprised when you submitted your report?

Mr. Denis O'Connor

I don't think they were surprised, but it was confirmation of what they knew and it was also looking at the outlook for the next number of days which was emphasising that the ... as deposits were up for, up for renewal, if they were not rolled over at that stage - there were no corporate deposits more or less being rolled over - what they had been told by the banks was going to happen.

Was there a sense of urgency?

Mr. Denis O'Connor

Yes, extreme urgency.

They were really worried by that state.

Mr. Denis O'Connor

Yes.

And, were there views expressed by IFSRA that you can recall from those meetings?

Mr. Denis O'Connor

Everybody, everybody was offering their views at the time around the table but the main issue was concern. Northern Rock episode had happened over the last number of weeks, there were people queuing on the streets to take out their money from deposits, that was what the Government, or the Department, wanted to avoid at all costs, so they had to put in place some plan that would give confidence to the whole system.

Yes. The Department of Finance, what contribution did they make to those meetings?

Mr. Denis O'Connor

They were all offering the same type of advice.

Which was what?

Mr. Denis O'Connor

That we had only one attempt at this and we had to get it right.

Okay, right so.

The NTMA had concerns about putting any of the pension funds on deposit in Anglo. Was ... did they feel vindicated or did they say anything to that effect?

Mr. Denis O'Connor

That wasn’t discussed really.

Yes, but what was their contribution because they seem, within the public sector, it was seen as somewhat further away, I suppose, than some of the other bodies that you were meeting with.

Mr. Denis O'Connor

Maybe they did but at that point in time we were two days before impact, as the man says, so we were all in the same boat, actually just put a plan in place, as opposed to look back historically.

And the Taoiseach's Department, were they represented on that ... on that group that you reported to?

Mr. Denis O'Connor

No.

Mr. Aidan Walsh

No, not that I recall.

So, because of the seriousness it was decided to, to extend the exercise to all the six banks, was that the ... that was the decision on that day was it?

Mr. Denis O'Connor

On liquidity no, liquidity, the information on those three banks was all that was needed at that point in time because the guarantee came into place a few days later. The exercise on the other six banks was mainly on credit.

Mr. Aidan Walsh

That didn’t commence or wasn’t requested until 8 October.

So there was an interval between the ... at the end of Atlas 1 and the beginning of Atlas 2.

Mr. Aidan Walsh

Atlas 1 actually didn’t finish for us until we reported to the regulator on 6 October.

I see, but there was the meeting on 28 September where all the other-----

Mr. Aidan Walsh

That is right yes.

And were you involved in any of the discussions about the Government guarantee?

Mr. Denis O'Connor

I was at meetings in the Department of Finance where there were about 20 people where everything was being discussed. The guarantee was one of them but they were discussed more or less in total general terms, there was no specifics discussed at the meetings I was at.

Did they ask you for your input, given all the up-to-date information you’d provided, or guidance, on the form of the guarantee?

Mr. Denis O'Connor

No I wasn’t asked for my input on the guarantee as such. Our main ... our main job was to provide information to help them with what was ... what they were doing themselves, mainly on credit and on liquidity.

Thank you. Now, in your statement you also say that you made comments and observation about possible asset write-downs and scenarios:

[T]hese were for indicative purposes only. And we did not seek to "mark to market" property assets in the present economic environment (where the market for property assets is largely illiquid); in that context it is difficult to forecast the outturn of any immediate short term assets, sales or asset developments.

Did that detract from the exercise? You knew that they were heavily concentrated, as you reported, in a small number of borrowers and you knew they were heavily concentrated in property, so were we leaving out too much by not investigating what, what was going to happen in property and in, in preparing the scenarios?

Mr. Aidan Walsh

I think the focus of our work was actually to get a lot of detail behind the top 20 connections so in any one connection, there could be hundreds of loans and hundreds of properties providing collateral for that individual loan. So, the focus of our work was very much on commercial property loans and development property loans and getting as much detail behind those and helping to aggregate information in relation to connections and connections could ... loans could be out in a range of different names, different special purpose company names, individuals' names, partners' names. And we sought to bring together all the loans that related to a controlling individual within either that company or partnership or individual name.

But if you describe how the two scenarios that you added to the information you collected, how were they put together?

Mr. Denis O'Connor

At one of the meetings in the Department of Finance, there was a discussion on the assumptions the banks had made themselves. The banks ... originally they had two assumptions on what could happen going forward and it was felt that maybe those assumptions were not hard enough. So, there was a discussion among all the parties at a meeting in the Department of Finance, "Maybe we will do two extra assumptions or scenarios." And based on that discussion, where everybody chipped in, scenario 1 and scenario 2, as outlined in page 98 of our report, were compiled. The main discussions were around land and-----

Mr. Denis O'Connor

Land particularly, either zoned or unzoned. And the discussion there was for unplanned land, we would write down 45% over three years - 15% in year 1, year 2 and year 3 - and for land with planning, it was written down by 10% per annum over three years. They were things were added on. The amounts involved were not as large.

Chairman, could we refer to Vol. 1, the PwC core documents, on page 5, please? It will come up on your screen, gentlemen.

Mr. Denis O'Connor

That's fine, yes.

It's in your own green book as well. Looking at those, would it be fair to say that - on page 5 - that the institutions estimated a loss of ... it's not totalled but it starts with AIB thought it would be €2 billion and so on. That comes to €5.157 billion if I added up correctly. Then scenario 1 thought it would be €8.6 billion and scenario 2 thought it would be €10.3 billion. The concerns would be that while you had brought very important information to those meetings, this is way short of the eventual reality of the €64 billion. So, where did the scenarios come from given that they were so far short of what happened? And could I add to that? When the former Taoiseach, Mr. Cowen, was giving evidence - I don't know if you saw his presentation - he said on paragraph 25, the PwC analysis was "hopelessly optimistic" and certainly did not envisage the crisis to develop in the way that it subsequently did. So, those were scenarios within the banks. They still had no idea that we were headed towards the €64 billion and the inquiry we're conducting today.

Mr. Denis O'Connor

That's correct. I'll start off and Aidan can chip in. Well, first of all, to scenario 1 and scenario 2-----

Mr. Denis O'Connor

-----and you've added them up there for €8 billion and €10 billion. That's for a year. The scenarios were for year 1, year 2 and year 3 so if you multiply scenario 2 by three years, it's over €30 billion. And the other material bit of evidence that you need - this was done before the capital ratios in the banks increased from 4% to 10%, which is a significant increase, and also this was one year in advance of actually NAMA happening where the loans were written down to market. So, our work was done before NAMA, before tier 1 capital ratios increased from 4% to 10%. And also, there were a number of other issues like the amount of equity in the loans, which we had assumed was equity, wasn't really equity. It was actually borrowed from a different bank or a different part of the same bank. And the banks themselves were relying on personal guarantees of the borrowers and those personal guarantees proved not to have any value.

Mr. Aidan Walsh

Just, I would like to add to that, is that these scenarios were done in October 2008, which was around the time of the budget for the following year. And that budget was framed against assumptions that GDP would decline by 1% in 2009 and unemployment might rise to 7%. That was consistent with the outlook from the third quarter report from the Central Bank of the same time. The outturn for 2009 was that GDP declined by something ... 7% and unemployment rose to 15%. So the, the economic outlook in official documentation at the time was far more benign than the recession that evolved in Ireland over the subsequent two years.

But you were starting to look into, I suppose what I might call this can of worms and you found-----

Mind now Deputy, or Senator.

-----the ... a dilemma in the banks that they were unaware Chairman, I suppose, of just how deep these things were and you were discovering things like, on page 6 of the document, the top 22 exposures were ... 53% of them were in Anglo and 32% in AIB - a huge concentration in borrowers, a huge concentration in property. And you mentioned the optimistic view, but there were also people like Professor Niamh Brennan and Jim O'Leary, Morgan Kelly, notably, pointing out there had been 40 property bubbles which he studied in his ESRI article. Was none of this intruding into the conversations of the people whom you were dealing with, like the banks themselves, the Department of Finance, the NTMA perhaps and IFSRA? Did they not realise what was coming down the track?

Mr. Denis O'Connor

Not really. Nobody expected the recession that evolved over the next number of years at that point in time. People thought there would be a soft landing, as everybody was forecasting. There were a few exceptions, but those people really were exceptions.

Mr. Aidan Walsh

I think it is fair to say that within the banks the people we were speaking to thought that our analysis was unbelievably pessimistic.

So they actually believed that kind of banking was sustainable, with heavy concentration on property, heavy concentration on a small number of borrowers, high loan to deposits and high loan to value.

Mr. Denis O'Connor

Yes, that is correct.

How do ... do accountants just record that or is there a wider need for the auditor to say "We really ... I would have doubts as well that this model of banking can continue as in the past"?

Mr. Denis O'Connor

Well, to start, our team was not an audit team. We were totally independent from the auditors, so we didn't ... we weren't auditing the books. Like, our job, going back to basics, was more or less to go in and analyse what was in the loan books, be it concentrational risk or the number of individual borrowers, and assemble that information over the six banks and give it to the Financial Regulator. And that for him was new information, particularly over the six banks. And for all of us, the element of surprise when we saw ten borrowers more or less owing €18 billion was very significant, to everybody concerned at those meetings.

Would an auditor, say in a draper's shop down the country, would he just look at the books or would he say, "By the way, you have got a lot of 1952 suits at the back. I don't think you are ever going to sell those for anything remotely like what you paid." Do you do much of the latter? Would that form part of a typical audit?

Mr. Denis O'Connor

As part of our work it was and we looked at loan-to-value ratios, we looked at the concentrational risk, we looked at what ... whether there was planning in the areas or not or whether there was two or three shopping centres in the one small patch of ground coming up. That was all looked at and that was factored into our assessment of the risk on those top 22 borrowers, whether it was high risk, lower risk or moderate risk. And that was all part of our discussion and our debate over those four or five weeks in October-November.

And I note, from the auditor's website, that your collective bodies ... there's a lot of advice to the Minister, Michael Noonan, who will be in here tomorrow, on what he should put in the budget. Now does that contrast with auditing of banks in Ireland and elsewhere, which didn't see a bank crisis coming down the line? Is there a traditional view of auditing that just adds up the numbers and says "That's what they are" or one that provides the wider economic advice like you were just talking about there - there are other shopping centres, you know, a lot of the stock isn't going to sell? Which, where does the balance lie in that?

Mr. Denis O'Connor

Well, the audit is a statutory responsibility which is totally geared to the audit opinion. Our work was a factual report on the loans, on the concentration and on the risks. Our work finished up in a document of hundreds of pages. The auditor's work finished up in a two-page opinion, so they're totally different aspects of ... two different jobs completely.

And how did the recipients of your report on October 6 ... well, they'd since had the guarantee ... wasn't that it? But did they realise that huge changes would have to take place in the Department of Finance, the Financial Regulator, Central Bank and so on because you-----

Mr. Aidan Walsh

At that time-----

----brought this right to the fore?

Mr. Aidan Walsh

At that time there wasn't any discussion in relation to administrative change. Any discussion - and the total focus - was on how the crisis was evolving and what measures the authorities might be able to take to manage the crisis.

When you were choosing the scenarios, even just to model it, did anybody say "Let's go to a 50% reduction in property"?

Mr. Denis O'Connor

We went to 45%, so there wasn't-----

Well, how did the 45% so badly prepare the Government for the eventual bill that came in? You know, you were talking about-----

Mr. Denis O'Connor

Because of NAMA particularly. NAMA ... because of NAMA putting in a short-term-----

You're leading now, Senator. Back to yourself, Mr. O'Connor.

When you went to Atlas 3, that was having property people on board ... wasn't that right? Were they too optimistic about how property values would ... would fare in Ireland?

Mr. Denis O'Connor

I don't know whether they were optimistic or not, but the figures that they came up with were consistent with our scenario 1 and scenario 2 . They were in the middle of both scenarios.

When you were looking at things like sectoral concentration and borrower concentration and so on, when you were looking at the banks, did you come across bank records which were short of what you would regard as optimal?

Mr. Denis O'Connor

Bank records would change or vary from bank to bank-----

Mr. Denis O'Connor

-----and from branch to branch. But it is fair to say that if a plc was looking for a €100 million loan or €200 million loan, you'd have a lot of files and due diligence being carried out. Where developers were looking for that type of money, the quality of information available to the bank was not as strong or not as good.

Because that was a NAMA complaint ... was ... when they ... why did NAMA have a 61% discount on one of the banks? Because they found record-keeping was poor. Was that something which a normal audit might be expected to discern in banks, whether their record keeping was good?

Mr. Denis O'Connor

I think what NAMA found out was some of the security in place was not as expected. An auditor would not normally go into that level of detail on ... checking security.

Should there have been closer contact between the auditors and the regulators?

Mr. Denis O'Connor

I don't really ... I can't comment on that, I don't know. But, I think, since the tribunal ... or since the recession has happened, there is more contact ongoing at the moment between the auditor and the regulator.

The lessons of this crisis for reforming the relationships between the auditors and the clients. Could you give us some views on those?

Mr. Denis O'Connor

Sorry, say the question again.

Does auditing and the relationship with the clients ... does auditing itself need to be reformed? Have we learnt lessons from what happened us in the years up to 2008?

Mr. Aidan Walsh

Could I just say that neither Mr. O'Connor nor I are current practising auditors. Our colleagues gave evidence to the committee a number of months back to discuss audits particularly in the financial ... regulated financial environment. I don't have views in relation to what the auditor's role and how it gets regulated and I don't have views in relation to how that should evolve.

Thank you for that. Thank you Chair.

Can I just wrap up one item there with you? Senator Barrett was dealing with some issues around 28 September and so forth and Mr. O'Connor and Mr. Walsh, you are both invited to respond relative to any information you might have on the following: was PwC involved in any discussions about the Government guarantee?

Mr. Denis O'Connor

I was at a number of meetings at the Department of Finance where the guarantee was discussed.

Prior or post?

Mr. Denis O'Connor

Prior.

Mr. Denis O'Connor

The week of the 23rd or 24th, whatever it was, of September.

That was the earliest there?

Mr. Denis O'Connor

I can't say the date but sometime in that date-----

In or around.

Mr. Denis O'Connor

In or around that.

Okay, so, in or about-----

Mr. Denis O'Connor

The 24th or 25th. And at that meeting the guarantees, among other options, were discussed and our role there was more or less to provide some information on the land and development exposures or liquidity.

Was that the only meeting that the guarantee was discussed or did you have others?

Mr. Denis O'Connor

I was at a couple of meetings ... it was discussed but it wasn't the main focus of the meeting, it was one of, will we do this, will we do that, will we do the next thing and that was one of the things we-----

Who would have been at those meetings?

Mr. Denis O'Connor

IFSRA, Central Bank, Department of Finance, Merrill Lynch, Arthur Cox, all the advisers. There was 25 or 30 people at them.

Would the Minister of Finance have been at-----

Mr. Denis O'Connor

He was at most of them and the Taoiseach was at one of them.

The Taoiseach was at one-----

Mr. Denis O'Connor

Yes.

-----and the Minister of Finance was at most of them, if not all, yes?

Mr. Denis O'Connor

Yes.

Okay. So how many meetings in between, let's say it was the 24th approximately, up to the eve of the guarantee? By your recall, how many meetings were there that discussed the guarantee?

Mr. Denis O'Connor

They were working groups. I was at two or three of them anyway and the Taoiseach attended one of those.

How long did the meetings last in terms of discussing the guarantee?

Mr. Denis O'Connor

Hours.

Mr. Denis O'Connor

Yes.

Okay. So the guarantee would have been discussed for-----

Mr. Denis O'Connor

No, the meetings were ongoing, the guarantee was part of the ... there was one element of the meeting.

So, how placed into the agenda of those meetings was the guarantee?

Mr. Denis O'Connor

There weren't really agendas, just more or less ... things were moving so quickly, banks were falling, the world was changing and we were, as I said earlier on, trying to make sure that there weren't people queuing on the streets to take money out of their banks.

Were you there to just provide information or were you there in a passive position or in a more engaged position in that regard?

Mr. Denis O'Connor

Probably providing information.

Providing information, okay. And what were the questions from Government in regard to information sought from you in regard to the guarantee and other matters?

Mr. Denis O'Connor

Mainly amount, sorry, mainly around the amount of money in land and development loans, unplanned, unzoned and we were only getting information, more or less, on that morning and passing it on that evening.

Okay. And what was the strategic options discussed?

Mr. Denis O'Connor

Nationalisation, guarantee, park, those type of things were discussed but it was more in ... I wasn't involved in the total detail of those.

Okay. Nationalisation of what?

Mr. Denis O'Connor

A bank, number of banks, any-----

Which bank?

Mr. Denis O'Connor

The one that was nationalised in January 2009, Anglo.

Anglo. So there was discussion-----

Mr. Denis O'Connor

Sorry, a discussion would be harder to say. It was, "maybe we can do this, maybe we can do that, maybe we can do the next thing".

But the option of discussing Anglo, was it the ... sorry, the option of nationalising Anglo, can you confirm or not whether it was discussed?

Mr. Denis O'Connor

It was discussed.

By whom?

Mr. Denis O'Connor

By the whole meeting.

The whole meeting. Was the Taoiseach at that meeting?

Mr. Denis O'Connor

I am not sure if he was at that meeting or not. I can ... possibly was but I cannot tell you for definite.

Okay. And was at any time the option of how prepared the Government were or the Department of Finance in terms of the nationalisation of Anglo, preparation of legislation, anything like that?

Mr. Denis O'Connor

Not to my knowledge. There was concern that people abroad could not distinguish between Anglo Irish Bank, AIB and AIB, plus the Bank of Ireland and Central Bank of Ireland.

Mr. Walsh, have you anything to add to that?

Mr. Aidan Walsh

I wasn't at the meetings that are referred to.

Okay. Thank you very much. Deputy O'Donnell.

Welcome, Mr. O'Connor and Mr. Walsh. How many engagements in total have the PwC complete for the Financial Regulator, the Central Bank, financial institutions, the Government agencies, between '08 and up to '13, and I suppose, up to date?

How many engagements has PwC been involved in in relation to the banks, either on behalf of the Financial Regulator, the Government, the Central Bank, the National Treasury Management ... any Government institution or the banks themselves between ... since the guarantee, since just before the guarantee up to the current date?

Mr. Denis O'Connor

Deputy, I don't know off the top of my head. Like, we have 2,000 people in the office so a fair bit of work has gone on but I can't ... I don't know off the top of my head.

Well, specifically, your department, what's your remit? Are ye corporate services-----

Mr. Aidan Walsh

Corporate services. Could I just say, we prepared today to come and discuss issues around our work for ... services we provided in the period September 2008 to January 2009 on the three Atlas reports. We've a very significant financial services practice across the firm and I ... we don't have detail in relation to the full range of assignments that the firm might have carried out-----

Mr. Aidan Walsh

-----in the financial services sector over the last, now, seven years.

But, specifically, we'll say on ... we'll say, the ... take just the Project Atlas programme, right - what would have been the type of teams, the size of teams you would have had involved?

Mr. Denis O'Connor

On Atlas?

Mr. Denis O'Connor

We'd about 25 to 28 people across the six different banks.

And at partner level, manager level, what would they break down at?

Mr. Denis O'Connor

They're mainly partners, directors and senior managers.

And the type of fees that you would've earned for Project Atlas, we'll say, for those three ... what was the total fees that ye earned for Project Atlas?

Mr. Denis O'Connor

Atlas 1 was €320,000. Atlas 2 was €1.6-----

Mr. Denis O'Connor

€1.6 million, and Atlas 3 was €450,000.

-----50,000, so in total, your total there would be-----

Mr. Denis O'Connor

€2.4 million.

Mr. Denis O'Connor

€2.4 million.

€2.4 million. And that was the total fees for the overall Project Atlas, for all the work on Project Atlas.

Mr. Denis O'Connor

For PwC work.

For PwC work. And the ... the ... going back on the Project Atlas itself, right, you ... in your witness statement, Mr. O'Connor, you said that ... that, "The PwC scenarios [analysed were] based on a number of assumptions and other than [Irish Nationwide they], had not been reviewed by [the] management in the Institutions." Why were Irish Nationwide provided with a copy of the assumptions and not the other financial institutions? And what type of response did ye get from Irish Nationwide and what was your view on the scenario analysis? Do you believe it was aggressive enough, given subsequent PCARs reviews of the banks?

Mr. Denis O'Connor

What happened with these scenarios was that the ... the assumptions were agreed, as I said, at a meeting in the Department of Finance with all the parties around. We gave the assumptions to the banks to run the models based on those assumptions.

And this was in Project Atlas 2.

Mr. Denis O'Connor

Yes.

Mr. Denis O'Connor

Two.

Mr. Denis O'Connor

I think it was two, yeah.

And the only difference between two and three-----

Mr. Denis O'Connor

Was property. JLL.

With JLL, to come up with valuations. So, we'll say, Atlas 1 was a desktop general overview just dealing purely with Anglo and Irish Nationwide. Am I correct?

Mr. Aidan Walsh

And ILP.

Mr. Denis O'Connor

And focused more on liquidity than loans.

Okay. Atlas 2 was where, effectively, you brought in all the financial institutions - all six - and you looked at two stress case scenarios in there that you wouldn't have had looked at in Atlas 1. So were in ... and this is ... we're dealing with Atlas 2. And Atlas 3, you brought in Jones Lang-----

Mr. Denis O'Connor

JLL.

-----to look at valuations.

Mr. Denis O'Connor

That's right.

Fine. So, really, the substantive work was done in Atlas 2.

Mr. Denis O'Connor

That's correct.

So, if we go into Atlas 2, tell me why Irish Nationwide were given sight of the assumptions and their views and the others weren't?

Mr. Denis O'Connor

No, there's a slight misunderstanding there. All the ... all the banks got the assumptions to run the scenarios but they were down at more junior level - at operative level. Because Nationwide was so all-centralised, the people who got the assumptions were the management as well and they queried them and said they were just unrealistic, over the top, total mad, whereas the people in the other banks just actually ran the models for us.

The people in the other banks ran the models.

Mr. Denis O'Connor

Ran the models for us.

Where did it end up with Irish Nationwide? Where did-----

Mr. Denis O'Connor

It ended up with what's there, like. They-----

Ye overruled them.

Mr. Aidan Walsh

Well, absolutely. We reported on scenarios as we'd given to them and they expressed the views quite forcefully to us that they were hopelessly pessimistic.

Okay. And can I . . . we'll say . . . the fact right that . . . and I'm reading from the summary report, Chairman, that was given on ... which was published on 20 February '09, and you state in ... in the summary, you state: "Under the PwC [it's page 37] highest stress scenario, Anglo’s core equity and tier 1 ratios are projected to exceed regulatory minima (Tier 1 – 4%) at 30 September 2010 after taking account of operating profits and stressed impairments." Now you said these took place on 17 November 2008. The two questions I suppose I want to ask: how do you reflect on that now with the fact that Anglo has cost the taxpayer over €30 billion that they’ll never see a red cent for? And, secondly, that when you reported on 17 November on Project Atlas 2 to the regulator, the Taoiseach of the day, Mr. Brian Cowen, came out two days later and he said:

The report confirms that all institutions reviewed are in excess of regulatory requirements as of 30 September 2008 [ the date the guarantee scheme was announced by Government] The PwC report demonstrates, under a number of stress scenarios, that capital levels in the covered institutions will remain above regulatory levels in the period to 2011. The Government's guarantee scheme has been successful.

The Government and the Taoiseach of the day relied on your report-----

This is turning into a speech. I need the question, Deputy. You've gone on quite a bit.

Well, can you comment on the fact that the Taoiseach of the day, two days after you gave him the Project Atlas report, made specific reference to your report in terms of stress case scenarios for loans as a basis underpinning the Government guarantee two months earlier?

The question is made. Now I need time for a response. Mr. O’Connor and Mr. Walsh.

Mr. Denis O'Connor

I can’t really comment on what he said. Like he said what he said. Our report was six weeks after the guarantee. The comments on tier 1 ratios at 4% is fine but tier 1 ratios increased up to 10% or in excess of that and that in itself had a huge change on the assumptions.

And what about the fact that the taxpayer has ended up forking out €30 billion for Anglo Irish Bank on the-----

That’s a fact. Can I get a question from you?

No, well, then can I ask you can you comment on the fact that you have stated in your report that under your highest stress case scenario on 17 November, Anglo would cover its tier 1 capital requirements and wouldn’t require taxpayers’ money but, in fact, it ended up €30 billion?

Mr. Denis O'Connor

As we said, at that stage the tier 1 ratio was only 4%; it increased to 10%------

But you also said-----

Mr. Denis O'Connor

-----and November-----

Deputy, I don’t want to be too intrusive now but I have to allow the witness the same amount of time at least to yourself that you have taken for questioning. Mr. O’Connor.

Mr. Denis O'Connor

Tier 1 ratio before 10% is a big difference and this is all before NAMA came in where there was an asset write-down of 60-odd% in Anglo’s banks, which we hadn’t foreseen.

Can you explain ... you made reference earlier to Senator Barrett that the capital that was in ... I don’t know if you were speaking specifically about Anglo or the other banks, that what was being reported as equity wasn’t actually equity, that here was an element of loans from other banks and subsidiaries. Can you expand on that?

Mr. Denis O'Connor

That’s all there is to say. The assumption in some of the banks was 80:20 - 80% debt, 20% equity, but the 20% equity was either from private banking or from a different bank so it wasn’t really real equity on some of their loans.

Explain that because that’s – oh, you were talking about the equity on the loans.

Mr. Denis O'Connor

Yes.

So effectively ... and when you looked at it further were there situations whereby there was nearly 100% gearing across the board on all loans?

Mr. Denis O'Connor

That’s correct.

Mr. Aidan Walsh

I wouldn’t say across the board on all loans. This was very much a loan-to-loan situation and there were marked differences between individual borrowers and individual loans in terms of loan-to-values and how the equity portion was funded. I think one of the issues we found was that while money might have been borrowed from the commercial bank, you might find a situation where the related private bank had lent money to fund the equity portion of that loan. Or a different bank had funded the equity portion of that loan.

Can I go back on this ... the ... looking at the stress scenarios on the loans in Project Atlas 2? What ... give me the basis of the assumptions in the worst-case stress scenario in Atlas 2? What was your worst case? What were your assumptions?

Mr. Denis O'Connor

In core documents, page 5, you see them down there on the impairment basis points. Scenario 2, this is for a year, out of three-year assumptions, residential mortgages: 15 basis points.

That would mean the value of the property would fall 15-----

Mr. Denis O'Connor

Residential mortgages-----

Mr. Aidan Walsh

No, that would be based on the loan. These-----

Explain for a layman. What do you mean by saying that the 15 basis points for mortgages?

Mr. Aidan Walsh

If there was £100 mortgage loan, then that's 0.15% provision against the £100 loan.

But did ye build into your scenarios in terms of projected fall in the value of property?

Mr. Aidan Walsh

In relation to mortgages particularly, we did no detailed work on the mortgage books.

But in terms-----

Mr. Aidan Walsh

But in Atlas 1 and Atlas 2, we took the highest level of provision that was made across the system and added 20% or 25% to that in arriving at that level for-----

But, in layman's terms, in terms of looking at your stress case scenarios and potential losses, and in the worst-case stress scenario, what did ye project property would fall by, commercial property?

Mr. Aidan Walsh

Could I just emphasise that we didn't set out to do a worst-case scenario.

But you did a worst-case scenario.

Mr. Aidan Walsh

We didn't call it a worst-case scenario. We looked at the stress ... two levels of stress that were significantly higher than the levels that the banks themselves were forecasting. We weren't asked for and didn't prepare a worst-case scenario.

But it's the highest stress. What will then ... in the highest stress scenario, what did you provide for that in terms of fall in the price of property? Commercial land.

Mr. Aidan Walsh

On the development land without planning permission it was 45%, and on development land with planning permission it was 30%, and that was against the loan value, not against the collateral.

And that was land. What about property itself?

Mr. Aidan Walsh

On commercial and corporate loans, we provided 375 basis points, which was about 4%.

So, 4%. And do you believe that was adequate, considering the fall in property-----

Mind now, ask the question, don't give a judgment.

Was it sufficient, Mr. Walsh?

Mr. Aidan Walsh

In hindsight - and here we are seven years on - no, that level wasn't sufficient. It was significantly higher than was being projected by the banks themselves at the time and I'd emphasise, again, that it was done as a time when the Government's own forecasts for the national budget was a 1% decline in GDP and a 7% rate of unemployment-----

But, Mr. Walsh-----

Mr. Aidan Walsh

-----which, a year later, turned out to be a 7% decline in GDP and a 15% level of unemployment. So, we were doing it at a time when the depth of the recession that emerged in Ireland was not foreseen, by us or the people that we were working with.

But, Mr. Walsh, ye took a 45% expected reduction in development land without planning. Over what period of time was that for, did ye think?

Mr. Aidan Walsh

Over three years.

And you took it ... for land with planning, you took 30% over three years. But then, in terms of commercial property itself, you took 4%, much of that which might have been unlet, maybe partially built; 4% would appear to be ... would you not feel it's a very small figure?

Mr. Aidan Walsh

No, anything that was partially built would have fallen into the development categories and what was in commercial and corporate lending was income-producing.

But, looking at it, even at that moment in time, where liquidity had dried up, the banks themselves were doing no further lending, surely 4%, right ... and I would assume the majority of the commercial loans, if you group all corporate commercial loans together, the majority of those would have been in the commercial area, correct? We'll say, the majority.

Mr. Aidan Walsh

The majority of value, yes, was in the commercial property area.

So, exponentially, the loss provision that you would have been calculating, the fact that you were only taking 4% on the commercial loan book, would give an artificially low projected loss. Is that fair comment?

Mr. Aidan Walsh

In hindsight, yes. At the time, it was significantly higher than any of the banks were forecasting for their books.

Okay, so you accept that. Can I ask, Mr. O'Connor, you were at various meetings on the ... there's a note, Chairman, on ... it's ... I'm going to a previous volume, but I'd say Mr. O'Connor would be familiar with it.

First of all, ask the question is he familiar with it, and then we'll talk about it.

Are you familiar with it? It's a note, a minute of a meeting of a meeting of ... 'twas either the 25th or the 28th, at which you were present at the meeting. They have you down as "Dan O'Connor", but I presume it's Denis O'Connor.

Mr. Denis O'Connor

That's the same man.

Same man, right. Are you Dan or Denis?

Mr. Denis O'Connor

Denis.

Okay, we'll call you Denis.

We're meeting you all over again.

Chairman, it makes reference ... are you familiar with the note?

Mr. Denis O'Connor

I am, yes.

Can I just make reference to it and ask you ... the Taoiseach was present and the Minister for Finance was present at that meeting. Was that meeting on 25 or 28 September?

Mr. Denis O'Connor

The 25th.

The 25th, right. Now, at that meeting, it makes reference, "[David] Doyle noted [the]Government would need a good idea of the potential loss exposures within Anglo and INBS - on some assumptions INBS could be 2bn after capital and Anglo could be 8½" billion. Were ye asked to do any further work on Anglo and Irish Nationwide on the foot of those comments by David Doyle?

Mr. Denis O'Connor

It's all part of Atlas 1 and 2. It was all rolled in together.

Were you asked for your comments, to give your opinion on the night, or your observation as to whether Anglo and Irish Nationwide were solvent at that time?

Mr. Denis O'Connor

No, we weren't asked at that time.

Did it come up for discussion at that time?

Mr. Denis O'Connor

Whether they were solvent?

Mr. Denis O'Connor

No, it didn't, no.

Do you believe, yourself, that Anglo and Irish Nationwide with solvent on the night of the guarantee?

Are you able to answer the question?

Well, I'd say Mr. O'Connor is a highly qualified man. I'd say-----

Let the witness determine his own credit-----

With due respect, Chairman, right, Mr. O'Connor was the only third-party person that would have looked at the balance sheets of the banks and their loans in the nine days up to - well, not quite nine, but certainly up to six or seven days up to that date-----

Mr. Denis O'Connor

On 30 September, after the guarantee ... You can define solvency by two ways. Can a company pay its bills when they fall due? Does its assets exceed its liabilities? After the guarantee, it could pay its bills as they fell due and, at that point in time - we cannot recognise any future losses at a balance sheet date - so its assets exceeded its liabilities.

Prior to the guarantee being put in place, was Anglo and Irish Nationwide solvent?

Mr. Denis O'Connor

That's a different question to answer, but-----

Sure that's why I'm asking the question.

Mr. Denis O'Connor

Well, the information we prepared for the 28 September meeting of the NTMA would have indicated that the deposits were not rolling over or expected to roll over on 30 September and future weeks, which would have left the banks in a very difficult position where we recommended to them a contingency plan had to be put in place.

And what contingency plan did you recommend be put in place?

Mr. Denis O'Connor

They had to get cash from the ECB, or from somebody else along the line, to replace deposits that were not going to be replaced themselves.

So, technically, prior to the night of the guarantee, technically, was Anglo and Irish Nationwide Building Society - I suppose, Anglo in particular - was it insolvent?

Mr. Denis O'Connor

Well, the Anglo calculations produced by management themselves would have indicated that it would have extreme difficulty in paying its bills as they fell due after 30 September.

And if you'd been asked on that meeting of 25 September whether Anglo or Irish Nationwide were solvent, what response would you have given?

Mr. Denis O'Connor

That's the answer I would have given. Unless some plan was put in place, a contingency plan put in place, to get the cash on 30 September, it wouldn't have been solvent. They had to put some plan in place to get the money.

So therefore, technically, prior to the guarantee it wasn't solvent, they were insolvent.

Mr. Denis O'Connor

If there was no plan. Maybe, they had a plan. But, if they didn't do anything, if the money kept going out the door, they had a problem.

Can I just go back to the ... by the end of 2013, €64 billion in the six financial institutions, can you comment on the capital adequacy of the Irish financial institutions, risk over-concentration in property and land and development, arrears identification, interest roll-up? And, in your PwC report, you stated that - this is core document Project Atlas 1, Vol. 1:

The latest available capital information for the Banks shows current core Tier 1 ... ranging from 5.9% [in Anglo] to 8.6% [in Irish Nationwide] ... at 30 September before any stress testing or scenario analysis ... The table [below left] sets out the Banks' estimated capital ratios and risk weight[ings] as at the 30 September.

The table on the right sets out State investment. So, I suppose, the question is, how do we get from a point with Project Atlas 2 ... Project Atlas 1 ... that you were saying that the banks had ... would have sufficient core tier 1 to absorb any losses? Take ... and I am factoring into that the lower core tier 2 that's required - I think, it was at 4%; it went to 10% in future time periods. Even with that situation, how do we get to a point where €64 billion went into the six covered financial institutions?

Mr. Denis O'Connor

On page 81, the page you have up there in front of me, what we ... all we highlighted there was the bank's management accounts position at the end of August or September for each of the banks. That's what the accounts were actually ... were saying. We hadn't done any work at that stage.

No work. And did you at all, when you had initially looked at the ... in Project Atlas 1, you reported on that on was it 27 September, am I correct?

Mr. Denis O'Connor

Or middle of ... the second week of October.

Second week of October. Did you advise the Financial Regulator and the Government that there was a need for more in-depth review of the loans of the banks?

Mr. Denis O'Connor

Yes, and that is what we did in Atlas 2.

Yes, but you still relied on management for Atlas 2. I mean, you relied, we'll say, on the ... did ye do any, I suppose, drilling down that, we'll say ... the fact that, subsequently, we'll say, there was results done by the Financial Regulator back in 2011 ... 2010-11, where it showed that the banks needs €24 billion. The question I'm asking is: being the professionals that you are, did you advise the Financial Regulator that the type of work that was done was insufficient?

Mr. Aidan Walsh

We did a very significant amount of work in Atlas 2 in drilling down into the top 50 loans by jurisdiction and the top 25 development loans - sorry, connections - which would have been into hundreds of loans and hundreds of properties, and we identified loans and connections that we regarded as higher risk, medium risk or lower risk. We had a lot of specific comments in relation to individual developers and collateral.

Just to your point in relation to the Financial Regulator's work in 2011, in my view, the world had changed fundamentally between 2008 and 2011. NAMA had been instituted, the properties were being transferred over so they were now being marked down at mark-to-market basis, the capital adequacy ratios had increased from 4% to 10%, unemployment had gone to 15%, mortgage books were starting to experience significant stress and default rates, and, by 2011, we were very close to the very bottom of the property cycle.

Deputy O'Donnell, I will let you back in again in the wrap-up.

Is it fair comment that the 4% potential reduction ... fall in the value of commercial property that you sought from '08 to 2011 in Project Atlas 2 grossly understated the fall in property ... commercial property as it happened over that three-year period, and if you had put in any ... what level of fall in ... in property prices would have given rise to a situation where you would not have been able to make the statement that the tier 1 ... the core tier 1 levels in the banks were sufficient to cover any impairment losses?

All right. I will bring you back in at the end, Deputy, and to wrap up, Mr. Walsh.

Mr. Aidan Walsh

I think the ... scenario 2 showed that in one of the banks, that they would breach their then 4% capital ratio and it's clear, in hindsight, that that 4% write-down was inadequate, but the-----

I suppose, the question I'm asking-----

I am sorry now, Deputy. I will bring you back in the wrap-up again.

It is a very simple question, Chairman.

You can come back to it. It doesn't matter how simple the question is. The witness must respond to the earlier question.

No, but, Chairman, I just want ... It's very simple. The 4 ... what level, if it had been 6%, 10%, ... at what level would all the banks have breached their core tier 1 requirements and you would have stated that the banks needed capital?

Mr. Aidan Walsh

All-----

Mr. Walsh, and without interruption, and then I am moving on. Mr. Walsh?

Mr. Aidan Walsh

All the banks, I don't know. But it's clear that, at scenario 2, Anglo would breach its core tier 1 ratios.

Mr. Aidan Walsh

Yes.

So ... but you didn't say that.

Mr. Aidan Walsh

We did.

We will come back to it in the wrap-up, Deputy. I'm going to be more tightly disciplined with time today, now.

I just want to deal with a couple of matters before I bring in the ... the leads have completed but before I move on to the other questioners, could one or both of you, Mr. Walsh and Mr. O'Connor, explain as to why the Government announced on December '08 that it intended to inject €1.5 billion into Anglo?

Mr. Denis O'Connor

Sorry, say it again.

Could either of you explain as to why the Government announced in December '08 that it intended to inject €1.5 billion into Anglo?

Mr. Denis O'Connor

I don't know.

Mr. Aidan Walsh

No, I don't know. We weren't involved in the discussions leading up to that decision.

Okay. So there was no analysis or services, to your knowledge, that PwC gave that informed the Government to come out with that announcement.

Mr. Aidan Walsh

The only information they had from us at that time was Atlas 2.

Okay. As we know, that never transpired that the ... Anglo was nationalised practically within a month of that announcement actually happening so there wasn't any injectment of cash; it was a nationalisation "prospacy". But you're unaware as to what informed the Government making that announcement. Is that your testimony?

Mr. Aidan Walsh

I'm unaware of what informed the Government.

Okay. All right, fair enough.

I just want to deal with some matters regarding to loan selection samples, the decision criteria and concentration risk for a moment before I bring in the next witness. The two relevant documents to this, you would be familiar with. There's your own statement, Mr. O'Connor, and there's the Project Atlas 2, Vol. 1 - the working draft of that. And in that, it says:

The top 22 exposures across the six institutions we have received total €25.5 billion, of which €13.7 billion [that's 53%] is in Anglo and €8.1 billion [that's 32%] is in AIB. The top ten exposures are each in excess of €1 billion, accounting for €7.5 billion [that's 17%] of the top 22 exposures.

It then goes on to say:

78.2% of Anglo's book is lent to property companies, 5.5% for personal investments and 6.3% to hotels. 42.2% of Bank of Ireland's book is in home mortgages. It appears that concentration limits may be exceeded in a number of cases [as the figures would have indicated as I've read out].

In your management discussions, what was the background and rationale for the major lending positions and the level of loan provisions from this examination?

Mr. Denis O'Connor

Sorry, what was the question?

I said, in your management discussions, what was the background and the rationale for the major lending positions and the level of loan provisions in this regard?

Mr. Denis O'Connor

The level of loan provisions was based on their actual judgment and the history they had with the client. They did it loan-by-loan, connection-by-connection, but the amount of provision they had made was very, very light.

Okay. Was it evidential based or was it, kind of, "Well, I know you and you're grand, I will give you a few bob", or was it that "We have a long-standing history with this guy and he always brings in the bacon?" What was the rationale underpinning it?

Mr. Aidan Walsh

The provisions at the time were based on loans that had gone into default. There were no expected future losses for loans that had not gone into default booked and that was in accordance with the accounting standards at the time. So the provisions was based on default ... loans in default rather than an economic view or judgment in relation to what might transpire over time.

In that regard, was there a view that loan loss provisions were not sufficient for relevant loans?

Mr. Denis O'Connor

In the banks themselves, they were happy the provision they had booked were adequate.

Mr. Aidan Walsh

And they were quite robust about that.

Okay. Could you give us an example of that robustness?

Mr. Denis O'Connor

Well, they disputed every additional provision and any negative comment that we would have made.

And were you challenging that position with the bank? And could you, maybe, give us an example of that discourse as to how that went back and forth?

Mr. Denis O'Connor

Just very strong discussions. I can't think of specific things, but each bank ... each lending officer was defending his own loans to the hilt.

Okay. When NAMA came before the committee, they gave an example of the lending model that was in place, and I'm just putting this out to see would ... did it kind ... was this related to the context of those conversations. Whereas where Mr. Daly says - he gives an example of the loan modelling - a developer would come in, they would borrow to develop a particular site.

The equity in that would increase because there was, kind of, very vast property inflation at the time. So when that was complete, in fact, the value of the property would be probably in excess of the original loan and there would be a significant degree of equity. The developer would then go for another loan and the securitisation and the deposit would be based upon the equity in the earlier ... there was no cash transaction-----

Mr. Denis O'Connor

Yes.

-----there was just this equity. Is that the type of discussions that you had in regard to ... well, how the loans were securitised and supported? Was it in that area or somewhere else?

Mr. Denis O'Connor

That'd be part of discussions. What Mr. Daly would have described is accurate; that would have happened. The one thing we were surprised at, as I said earlier on, was that if a plc was to go in for ... looking for a loan for €100 million, there'd be a huge amount of work, due diligence, everything else-----

Mr. Denis O'Connor

-----a massive exercise. This was not the case for developers.

Okay. And what would happen? Maybe that's something to the conclusion that we might come to in regard to how loans are dealt with in the future. And so just continuing that line of questioning, did PwC suggest that the greater loan book granularity should be pursued to view another 50 loans or was this at the suggestion of the ... of IFSRA or another party, given the outcome of the top 20 loan reviews?

Mr. Denis O'Connor

That was coming from the regulator.

The regulator said that you-----

Mr. Denis O'Connor

Yes.

-----needed to-----

Mr. Denis O'Connor

Yes.

-----drill down further-----

Mr. Denis O'Connor

Yes.

-----in that regard. And was that done?

Mr. Denis O'Connor

Yes.

And what ... did it reflect something different or something new or much the same?

Mr. Denis O'Connor

Very consistent, very the same.

Very consistent.

Mr. Denis O'Connor

The ... consistent, yes.

Okay. Moving on then to ... I just want to deal with the matter of ... were you aware ... and this comes back to your own statement again, Mr. O'Connor. Were you aware of summary information from PwC reports was likely to be discussed by Government officials from the Central Bank, the Financial Regulator, the Department of Finance, etc., at meetings taking place on 29 September 2008?

Mr. Denis O'Connor

No.

Was that a surprise to you?

Mr. Denis O'Connor

We didn't know about it until more or less it came out in the transcript that we saw there recently.

Okay. When ... in the information that you had been providing, did you know that it might be used in that regard or had you any indication that these discussions would, kind of, find themselves falling into this sort of environment?

Mr. Denis O'Connor

Well, we knew the Department of Finance were looking at the information and the regulator but we hadn't thought about where else it was going after that-----

If you-----

Mr. Denis O'Connor

-----and we didn't know the pace at which things would develop. I have to say that I was very surprised when I heard the news on the morning of the 30th, driving into work.

Yes. If you knew that information and data and analysis that you were providing to Government and other services had that stop on its journey - and I do want to take on board the speed and all the rest of it - would that have informed how you would have presented your information or would you have considered that you would have, kind of, maybe reshaped it or focused on other areas if you knew it was going to lend itself to a discussion like that?

Mr. Denis O'Connor

Not really. The information on liquidity was all factual. "This is the position as of now; this is what'll happen the next few days." And on credit, we had nothing done.

Okay. Other than the option of nationalisation, which we discover ... discussed earlier, was ... what were then other strategic options available to the Government before 30 September 2008?

Mr. Denis O'Connor

I can't remember. There was a part guarantee, full guarantee, nationalisation, issue new shares, ordinary shares, preference shares, that type of ... wide-ranging discussions that Merrill Lynch primarily were bringing to the table at that stage, mainly how you get more capital and more liquidity and equity into the banks.

Okay. All right. And just on ... coming back to your own statement there, Mr. Walsh, in which you say: "Following the granting of the Government Guarantee on 30 September 2008, our preliminary work on collateral that could be provided to the Central Bank in support of ELA was not pursued." In that regard, could you tell the committee why were PwC requested to draw up a list of loans that would be used as collateral?

Mr. Aidan Walsh

I think that applied to one particular bank that didn't have a mortgage book and most of the collateral was coming from mortgage lending rather than from commercial lending?

Which bank was that?

Mr. Aidan Walsh

Pardon?

Which bank was that?

Mr. Aidan Walsh

Anglo.

Anglo, okay, yes.

Mr. Aidan Walsh

And they wanted to see what loans with commercial property backing might be suitable to use in an ECB-type scheme and wanted to make sure that those loans hadn't been secured under any other funding mechanism.

Okay. And in your discussions with the Financial Regulator, did you ever express material concerns about additional liquidity and quality of the supporting collateral?

Mr. Aidan Walsh

We had very factual discussions in relation to the loans that were being put forward as possible collateral, the nature of the loans, the nature of the collateral supporting those loans, the work that could be done to ensure that they hadn't been secured elsewhere and to ensure that the security for those loans was in place properly.

And-----

Mr. Aidan Walsh

Yes, but they were factual discussions rather than-----

And, as that process progressed, it would then go on to the next stage, and in that regard, did the Central Bank and/or the Financial Regulator advise why the work on loans suitable for emergency liquidity assistance, ELA, were not pursued?

Mr. Aidan Walsh

The flow of funds actually changed dramatically on 30 September. What had been a rapid outflow of funds on deposit turned into a positive inflow of funds into the banks and the banks reinstigated their efforts to find new capital in the public markets.

Okay. The reason why I'm asking you is to, kind of ... to expand upon why that wasn't pursued is that the Government subsequently gave a guarantee which was a contingent commitment.

Mr. Aidan Walsh

Yes.

This is the State standing behind its banks and it's not a funding instrument.

Mr. Aidan Walsh

Yes.

There's no cash transfer. As we heard comments at the time, this was not going to cost ... it'll be the cheapest and all the rest of it. So why were you looking at ELA? And how can you square that off to us that you were in the area of looking at ELA and ELA then never ended up as an option?

Mr. Aidan Walsh

Well, we were looking at ELA before the Government guarantee was given. After the Government guarantee was given, the liquidity position in the banks improved quite significantly and-----

Because of the guarantee or because of-----

Mr. Aidan Walsh

Because of the guarantee.

Mr. Aidan Walsh

So people were now prepared to put ... they were able to get more money in the wholesale money markets and more corporate deposits coming back into the banks.

And maybe you could distinguish what the difference would be, for the committee, the State standing behind the bank created a certainty that created liquidity. If ELA had come in, what would have been different there in terms of cost to the State and other factors?

Mr. Aidan Walsh

I couldn't estimate what that would be.

Okay. Would the State have been exposed through the ELA in the same way?

Mr. Aidan Walsh

I'm actually not sure of the chain of security on an ELA arrangement. I don't know the detail, I'm afraid.

Okay. You wouldn't be able to give us, to the best of your ability, an analysis of the different exposures from ... one from the guarantee and one from seeking the ELA.

Mr. Aidan Walsh

Well, the guarantee was across the entire balance sheet. On an ELA situation, the bank would come with a parcel of loans and look to, effectively, get cash ... give the loans to the Central Bank and get cash in return for it.

Maybe just to arrive to the fundamental of it - and this is my very last question - by the State giving the guarantee, who ends up with the responsibility of the debt?

Mr. Aidan Walsh

The taxpayer ends up with responsibility.

Okay. By the bank being afforded the ELA, who ends up with the responsibility of any liability on the ELA?

Mr. Aidan Walsh

Well, the Central Bank and the ECB.

Okay. Thank you. Deputy Michael McGrath.

Thank you very much, Chair. You're very welcome, Mr. O'Connor and Mr. Walsh. Can I just take you back to the first engagement that you had with the regulator in September 2008? Can you advise the committee when PwC was first approached and by who? And what reason were you given for being contacted at the time?

Mr. Aidan Walsh

Our managing partners' office was contacted on 17 September with a request that a partner would meet with Mr. Neary the following day to discuss a very confidential assignment.

Mr. Aidan Walsh

And that's the first contact we had with Mr. Neary then when we met him on the 18th.

Okay. So the meeting happened the following day following the initial contact. Was there any procurement process involved for the appointment of PwC?

Mr. Aidan Walsh

I'm not aware that there was a procurement process and I'd be surprised if there was because Mr. Neary was very concerned about the confidentiality and the sensitivity of the work that he was asking us to carry out.

Okay. And can you comment if you were requested for any input into the scope and specification of the engagement or was this provided to you by the Financial Regulator at the time?

Mr. Aidan Walsh

We had a discussion with Mr. Neary and his colleagues in relation to what their needs were and what work we felt we could do within a very tight timeframe.

Mr. Aidan Walsh

We documented the scope following our meeting, shared it with Mr. Neary and his colleagues, got some editorial comments of a technical nature rather than a substantive nature, and signed off on that scope of work.

Sure, and were there a number of drafts of the letter of engagement between the regulator and your firm?

Mr. Aidan Walsh

There was probably one or two, but as I say, in terms of the scope there wasn't any substantive change from what we discussed and then-----

Mr. Aidan Walsh

-----documented initially.

Okay and I think you said that the overall fees for the three Project Atlas reports was €2.4 million. The Minister has previously put a figure of €3.8 million on the record in the Dáil. Is that accounted for by fees to Jones Lang LaSalle? Or can you account for that?

Mr. Denis O'Connor

Probably is JLL and VAT.

Mr. Denis O'Connor

JLL got €670,000, so €2.4 million, €700,000, €3.1 million, plus VAT gets you up close enough to that.

Okay, so the €2.4 million you quoted is excluding VAT.

Mr. Denis O'Connor

Yes.

And can you comment on what other fees PwC earned during the banking crisis by way of due diligence on AIB, Bank of Ireland, during the various recapitalisation programmes that took place in the subsequent couple of years? Do you have the overall picture?

Mr. Denis O'Connor

I don't have the overall ... like, I don't have the overall picture here. You're correct, we did due diligence for the pension funds on AIB and Bank of Ireland as part of the preference share investment. We did work on Anglo for the Department of Finance in '09. We did work on INBS and EBS as part of a proposed merger of the building societies that didn't happen in '09 or '10-----

Mr. Denis O'Connor

-----but that type of jobs were done.

Sure. Can I ask you, Mr. O'Connor, just to clarify a comment you made to Deputy O'Donnell on the issue of whether Anglo was solvent on the night of the guarantee? And I think you used the measure of whether it was able to meet its obligations as they fell due, as opposed to the measure of whether its liabilities exceeded the true value of its assets. Can you just clarify your statement that Anglo, in your view, was insolvent at the end of September 2008?

Mr. Denis O'Connor

Well, the Anglo projections they had produced themselves for management would have indicated that it couldn't pay its bills as they fell due without some contingency plan or plan on 30 September. The assets exceeded liabilities because you can't book any future losses at that point in time.

Yes. So you were using a liquidity measure of solvency, as such-----

Mr. Denis O'Connor

A liquidity measure, yes, yes.

-----in arriving at that conclusion.

Mr. Denis O'Connor

So, after the guarantee it ... it was back in a solvency position again.

Okay. Can I just ask that page 5 of the core booklets would again be put up? And, so this is Project Atlas No. 2. And just so that we're all understanding these figures correctly, the box on the top left, looking at the impairment basis points. So, for residential mortgages scenario 1, 15 there is actually 0.15%.

Mr. Denis O'Connor

Correct.

So, similarly, development land without planning permission is 10% in scenario 1 and 15% in scenario 2.

Mr. Denis O'Connor

Correct.

Mr. Aidan Walsh

On an annual basis.

Mr. Denis O'Connor

For three years.

Yes. Just so we're getting our zeros correct. And this was the assumption for scenario 1 and scenario 2 for one year.

Mr. Denis O'Connor

Yes.

And it was clear in the report that the overall assessment was based on a repeat of that for three successive years.

Mr. Denis O'Connor

Absolutely.

That was clear in the documentation because it's not clear in the extracts we have here.

Mr. Aidan Walsh

But it ... it is clear in the overall document which was furnished ... which we ... was furnished to us from yourselves.

Yes, okay. So the projection for development land without planning permission was, under scenario 1, that it would fall by 10% in 2009 and 15% in 2009 under scenario 2. Is that correct?

Mr. Aidan Walsh

Yes.

Okay and that that would repeat for three years, so a total fall, in development land without planning of 30% or 45%. And on the area that Deputy O'Donnell zoned in on - commercial/corporate, so scenario 1, a 1.5% drop in commercial property values in 2009, and scenario 2, a 1.25% drop in 2009.

Mr. Aidan Walsh

And they were provisions against the loan balances, rather than the underlying collateral.

Okay. Yes, these are impairments of the loan balance.

Mr. Aidan Walsh

Yes.

So, bringing you to either 4.5% or 3.75% of full provisions. So, I think in your discussion there, you are accepting that overall, given what happened subsequently, those impairment levels - which were not intended to be a forecast, and that is clear in your document - ended up hopelessly underestimating the true extent of the impairment in that area.

Mr. Aidan Walsh

That is correct but also the economic environment was significantly worse than people involved in this work, or involved in working with us, anticipated at that time. And I'll go back to the 7% fall in GDP and the 15% unemployment rate that transpired through 2009-2010, compared to what the Government's own forecasts and the Central Bank forecasts were-----

Mr. Aidan Walsh

-----for the same period.

When did the tier 1 capital requirement go from 4% to 10%?

Mr. Denis O'Connor

I think-----

Because you've referred to it a number of times.

Mr. Denis O'Connor

I think in '09 or ... in 2010, I think, and that's ... not certain on that. I think 2010.

2010, so it wasn't in any way relevant at the time when-----

Mr. Denis O'Connor

No.

-----when these reports were being compiled? And when did PwC conclude that additional capital would have to be put into Anglo Irish Bank?

Mr. Denis O'Connor

We didn't conclude ... we didn't conclude on that. Anglo ... the board of management liaised with the Department of Finance, the regulator. PwC were not involved in those discussions. After our Atlas 1, 2 and 3 reports on Anglo we didn't do much more work on that until some specific assignments on the business plan, etc., back in 2009, I think.

Okay, but even under the most adverse assumptions that you made, your analysis was projecting at that time that Anglo would not need any additional capital in order to meet the minimum capital requirements.

Mr. Denis O'Connor

That's-----

Mr. Aidan Walsh

No, I think-----

Through 2009 and 2010.

Mr. Aidan Walsh

I think that's ... that's not correct. I think, under scenario 2, we said that Anglo could breach its capital requirements at 4%.

Well then, just go to that excerpt on page 37, which isn't on the system, of the summary document which has been published - that under PwC highest stress scenario, and it was core equity and tier 1 ratios are projected to exceed regulatory minima 4% at 30th of September 2010, after taking account of operating profits and stressed impairments. So, under the highest stress scenario, you were projecting that Anglo would not need any additional capital and would still be in excess of the minimum capital requirements two years forward, using the assumptions that you were working under. Is that correct?

Mr. Denis O'Connor

I don't have that document in front of me, but if you're reading it out there that must be it.

And you make it clear that you were sticking with the four of the five assumptions that management had made in their assessments, they're in the previous page of that document. And assumption one is, Anglo will continue to generate core operating profits in line with existing profit levels, despite the current downturn. So your projections were based on that assumption, that Anglo would continue to be profitable going forward into 2009 and throughout 2010. You accepted that management assumption.

Mr. Denis O'Connor

At that time we did, but it was not correct. Anglo did not make any profits for any of those years, and that was a ... one of the big issues with the forecasts. Any of the banks made very little profits in '09 and '10 because there was no activity.

Finish up now, Deputy.

Thanks, Chair. Finally, one of the reasons that you cited earlier for the true picture ending much worse was around the issue of loan security, security not being properly tied down, cross collateralisation, personal guarantees not being worth a whole lot when the bank tried to pursue them. But when did you first identify any concerns in that area, because even going back to the letter of engagement for Atlas 1, point No. 9 in appendix A, you were to select a sample of the customer loan balances at the end of August '08 on the large exposures, and review the loan files, discuss the contents of these files with members of management. And then subsequently, in October, letter of engagement for Atlas 2, you were required to again review the loan balances at the end of September '08 for the top 20 this time-----

A question, Deputy.

-----and review the loan files, and discuss the contents of these files and supporting documentation with members of management. So your engagement did require you to look at the underlying documentation in respect of the loans extended to the major borrowers. So did you identify any concerns about the underlying security, cross collateralisation and securities not being legally tied down?

Mr. Denis O'Connor

Correct. We looked at the loan files but security is not kept on loan files. Security is a separate issue completely and we did not look at security under any files. That was part of the legal process that happened and that really wasn't identified until NAMA came into being and they transferred the loans from the banks to NAMA. And as part of the legal due diligence it was found that the security assumption was totally flawed.

Okay. So Project Atlas 1, 2 and 3 did not identify or examine any issues in relation to the underlying security underpinning the loans given to the largest borrowers of Anglo.

Mr. Denis O'Connor

That's correct.

Thank you, Deputy. Senator Susan O'Keeffe. Senator, ten minutes.

Thank you, Chair. Gentlemen, good morning. Is it ... is it the case that your analysis was based on management accounts of the relevant banks and that it didn't involve any independent verification procedures?

Mr. Denis O'Connor

That's correct. If you think about it-----

And what ... and if so, why?

Mr. Denis O'Connor

-----we were there in September. Any audited accounts would be very historical at that stage. The most relevant and updated information was the recent management accounts, which would have been the end of August.

And could the management accounts and the half-year management accounts have been requested directly by the Financial Regulator to ascertain the information? Could the office have gone directly there and said, "Just give us those"?

Mr. Denis O'Connor

Yes, they could have and they probably had them but they ... the amount of action that was going on and the amount of staff in the regulator's office meant he couldn't do everything at that stage. There was an avalanche of information coming in his direction.

Okay. So when you ... you had ten days effectively between that meeting on 18 September to the bigger meeting, then, of 28 September that you spoke about. Am I correct in understanding that that was your last contact with officials prior to the guarantee - was on the 28th?

Mr. Denis O'Connor

Correct. Sorry, apart from two e-mails that I sent to the Department of Finance confirming the positive outflows in three banks on 29 September and inflows on 30 September.

Yes. So did anybody pick up the phone, did anybody talk to any of you between the evening of the 28th and the evening of the 29th? No.

Mr. Denis O'Connor

No.

And so, why was there, if you like ... 'cause that was a Monday, wasn't it?

Mr. Aidan Walsh

Yes.

Why do you think ... why was there a pause? Were you expecting that when you left the meeting on the 28th? Were you expecting that there'd be a silence or what were you expecting to happen at that point?

Mr. Aidan Walsh

I don't think we had any defined expectations? We went back to trying to collect information in the three banks that we were working on. I ... I have to say we weren't aware of the pace at which the discussions in relation to how to implement the contingent plans were developing. I think we were both surprised when we heard news on the morning of Tuesday the 30th in relation to the ... the guarantee being announced.

On page 85 of Brendan McDonagh's evidence, which you may or may not have seen, but he talks anyway about the meeting on 28 September and he says, you know, there were a range of options - and you've said that yourselves - "But in any of the meetings that [we'd] had up to that point, all the discussion seemed to be pointing that it was inevitable that we were going to nationalise Irish Nationwide and Anglo Irish Bank". Now, I appreciate that you weren't called in as advisers at that level but you were at some of those meetings that Mr. McDonagh was also at. Did you take that impression away?

Mr. Denis O'Connor

It was an option being discussed. I wouldn't have said it was the only option, but it was discussed.

No, no, no. He doesn't say that either. He says it was "pointing that it was inevitable that we were going to nationalise". So that was his ... that was the opinion that he took away and I am asking whether you would share that opinion at that point or not.

Mr. Denis O'Connor

I wouldn't share ... it was the only option being discussed at-----

No, again, Mr. O'Connor-----

Mr. Denis O'Connor

No, I wouldn't share that ... his total opinion on that.

Okay. Mr. Walsh?

Mr. Aidan Walsh

I wasn't at those meetings on the 24th and 25th.

Okay. So, in terms of the, if you like, the gap between the 28th and the 6th of October, as the week unfolded and you saw the guarantee and all of that, are you saying that there was then no contact at all between you guys - your team - and the Financial Regulator and everybody else that you'd been dealing with?

Mr. Denis O'Connor

We were still working on our reports.

Mr. Denis O'Connor

Yes, but-----

So, on the morning of the guarantee, you'd heard it on the news, you didn't go in and go "Okay. We need to meet them, we need to talk to them, we need to give-----". No?

Mr. Denis O'Connor

No.

Mr. Aidan Walsh

No.

Why do you think that was?

Mr. Denis O'Connor

Our work was independent of that. At that stage, we had moved on to the underlying loans and the ... the liquidity issue had gone now. The guarantee was in place so that the banks were liquid again, they had deposits, they could open their doors the following morning. So, now we were going on to looking at the loan books - the top 20 loans in each bank - and because we are dealing with the banks themselves, we actually were not dealing with the Department or the regulator or anybody else.

At what point did it crystalise for you that there was such a concentration of lending among such a small group of lenders? What ... when was that ... at least that you knew of it, even if you didn't know the entire detail of it? Can you recall when you knew that?

Mr. Denis O'Connor

Probably in the second or third week of our work. When we went from bank to bank, like, you had borrower A in one bank who had X amount, then you went through the same borrower A was ... another couple of hundred million in the next bank. When you put them all together, it became evident very, very quickly that the top ten borrowers had huge amounts of money out there.

So in the first ten days it was evident, even if all the detail of it wasn't evident.

Mr. Denis O'Connor

Yes, well the ... the balances were building up as you went through your work because, as my colleague has said, the connection is not easily tracked down on day 1-----

Mr. Denis O'Connor

-----because it could be any combination of loans in this ... controlled by this individual.

And so at what point did you share that information, that at the very least there was this high level of concentration among a small number and, therefore - there's a vulnerability attached, I take it, if you have a small number with a big loan - so where, at what meeting did you say "Guys, this is what we're finding. We haven't got all the detail yet."?

Mr. Denis O'Connor

I can't tell you the exact date of the meeting, but it would have been ... come through fairly early ... very early in our work, probably in early October.

Early October. Not before the guarantee, even though it was clear in the first ten days.

Mr. Denis O'Connor

No, I'm not ... we hadn't gone into the banks in the first ... we hadn't gone into the banks looking at the loans pre the guarantee. At that stage, we were looking at the amount of loans in land and development in the various asset captions as opposed to the various individuals.

Okay. So nothing was known about the individuals and their concentrations prior to the guarantee.

Mr. Denis O'Connor

As far as I can remember.

According to you, I mean.

Mr. Denis O'Connor

Yes. Yes.

Okay. Now, Mr. McDonagh talked about when he ... he had asked in relation to Goldman Sachs and in relation to INBS, he said, you know, there were 33 questions, he referred to at his evidence here, that I want to know the answers to and he had e-mailed them to the Department of Finance. He said they were terribly basic questions. He described them as commonsense questions in his evidence and I am just wondering whether or not that, sort of, lack of evidence ... that lack of detail was apparent to you also in the work that you were doing. He was saying that he was surprised by the lack of information available.

Mr. Denis O'Connor

Information available in INBS or at the regulator?

In the regulator. Those basic questions could not be answered by the regulator about INBS.

Mr. Denis O'Connor

That didn't really come across our work because he had asked us to go in and get information for him. We didn't ask him what he had already, if you know what I mean. Like, we didn't discuss with him what he already had.

Okay. Mr. McDonagh also suggested at one point that he would like to share the Goldman Sachs information with PwC to get their view. Did that happen do you recall?

Mr. Denis O'Connor

I ... I presume so because everything was shared at that stage.

Everything was shared.

Mr. Denis O'Connor

Yes, yes, yes.

Okay, and did anything coming from there change your view in any way?

Mr. Denis O'Connor

No.

In the information that you gave to ... in that ... one of those e-mails that you referred to - on 28 September - you say that "We have not had the opportunity to discuss the comments with management of the three institutions." I'm not clear, reading from the summary report and reading from the e-mail ... at what point did you talk to management about what you were saying and what they were saying, as opposed to just looking at information that they were giving you?

Mr. Denis O'Connor

Those e-mails you're referring to obviously came from the teams down along the line in the different banks. We hadn't discussed them or agreed them with the more senior management.

Why was that? Was that because-----

Mr. Denis O'Connor

Because of time. Because of time.

-----they wouldn't meet you or because there wasn't time?

Mr. Denis O'Connor

No, no. They just hadn't time.

Mr. Aidan Walsh

No, no. They were available to us. They were available to discuss things. It was a question of collating information and getting a picture before we engaged in significant discussion with more senior management.

And do ... should it ... I mean, by the time you were going into that meeting on the 28th, should you not have had that opportunity to talk to senior management before you went into that meeting?

Mr. Denis O'Connor

I don't think it was relevant at that stage because the information we were getting on liquidity was a matter of fact. We could get it off the guys in the treasury department ... how much money was coming and going on those days and what was forecast to go over the next number of days. There wasn't any judgment on it, where you would have discussions with senior management. It was quite easy to identify the amount of big loans that were up for maturity and whether they would roll over or not.

Was there at all a sense that you were trying to keep Anglo going to the next weekend at that point. So, this would have been the Sunday - at that meeting - and you would've had meetings in those few days. Was there a sense at all that that's what you were trying to achieve?

Allow an answer now, Senator. I'll allow a response and I'll allow you back in again once more.

There's been a lot of discussion about, you know, trying to keep Anglo going to the next weekend and; nobody wanting to intervene or do anything during the week.

Mr. Denis O'Connor

Well I'm not sure about that. The Anglo crisis point was Tuesday. It was end of year for them - 30 September - and I said earlier on, lots of deposits were up for maturity on that day. Depositors from other parts of the world really couldn't distinguish. It's hard to believe but they couldn't between AIB and Anglo Irish Bank and the contagion effect if one bank was to go would knocked everything else over at the same time. So it was key that all confidence was kept in the market and that whatever was to happen was to happen in an organised manner in the next number of days and we had only one attempt to sort this out.

A brief supplementary now - a supplementary and then we're moving on, Senator.

So sorry, when you say the depositors wouldn't be able to distinguish between Anglo and AIB, why?

Mr. Denis O'Connor

Because they're both ... one is Anglo Irish Bank, one is Allied Irish Bank. If you're somewhere over in ... wherever you are and you're putting money on deposit, they don't go into that level of detail. They're investing really in Ireland at that rate of going and our understanding and our discussions with management and with other people was that one bank going in Ireland would have a contagion effect and all the banks would be in the same boat and the amount of discussion that would go on to distinguish one from the other will not happen. They will just put it into a more secure bank in a different country.

Thank you. Can I just clarify one thing on that? The deposit exposure in Anglo, I understand both are AIB in one way or another and I can understand from a distance there can be confusion, but the personal deposit exposure between the two institutions ... were they similar?

Mr. Denis O'Connor

No, the personal deposits holders in Anglo would be very small. It's mainly all corporate deposit holders.

And the investor depositors, as they would be in financial institutions ... like we know the loan portfolios and all the rest of it but in terms of confusion on the international market, did people who would be depositing wouldn't be depositing in Anglo Irish ... Allied Irish Bank or sorry in Anglo Bank? Am I right there, no?

Mr. Denis O'Connor

No, well there was concern-----

There might be confusion but the people were actually voting with their feet and put the money in. There was no confusion with them when you look at the profile of the two banks.

Mr. Denis O'Connor

What you're saying is right but if Anglo Irish Bank was to fall over on any one of those ... at that point in time - 29 September, 30 September - it would have impacted on AIB as well.

Alright - Senator Marc MacSharry.

Thanks very much and thanks gentlemen for being here. Can I ask you can you advise to the extent of discussions you had with management of the financial institutions regarding the collating of arrears, information on non-performing loans and interest roll up at certain-----

Phone interference - will people please turn off their phones please if they're near the Deputy because we'd have two more days of this? So I'm sorry now for interrupting you Senator but if there's a phone in proximity to you, I want it turned off please because it's interrupted you.

Understood. Where did I lose you there gentlemen?

Mr. Denis O'Connor

To answer your question, we-----

Sorry, I'm just going to stop proceedings for a moment until the phones are switched off there. Mr. O'Connor, just hold on a minute and I'll stop the clock.

Mr. Denis O'Connor

I'm good.

Okay, is it good? Okay, we'll resume so please.

Mr. Denis O'Connor

We looked at the arrears portfolio. We looked at all the watch lists there at the end of August, the-----

Sorry, I'm just going to suspend for just 30 seconds before the phones are switched off there-----

Do, yes, for security.

Will people in proximity to Senator MacSharry please turn off their phones and then we'll resume? We've a lot of complaints in the public last week about this and I'm not going to go through the last week with the same level of complaint coming in in broadcasting and all the rest of it. So, back to yourself, Senator MacSharry.

Will I finish the question? I was saying that there's the arrears issue, non-performing loans obviously, and the level of interest roll-up on certain facilities and the percentage representation of interest roll-up on the overall book.

Mr. Denis O'Connor

Yes, as part of our work, we looked at all those characteristics you've said but they were a bit out of date in that the files that were available to us were probably July and August at that stage and the arrears interest roll-up on the watch lists came after that.

Was all management in the various institutions forthcoming? Were they happy to see you and three bags full, whatever you needed or were they obstructive and laissez-faire about the pace at which they sought to help you?

Mr. Aidan Walsh

No, they definitely weren't laissez-faire. They were organised and structured to meet us, to share information, to make sure that they understand what our questions were, to make sure that they made loan officials available to us, to make sure that we got access to the loan files we asked to see. Just to go back to your earlier question, one of the things that surprised us a little bit was they didn't have separate analysis of loans that were just interest-only or interest roll-up, that they struggled to identify the value of interest roll-up in their P&L accounts.

Okay. Did you seek to understand the material ... the number of material loans by clients that were restructured in advance, say, in the period up to 2008?

Mr. Aidan Walsh

Again, yes ... the information didn't facilitate that. Loans got rolled over. Loans got renewed. The practice at the time was when a loan matured, unless there was something desperate going on, it tended to get rolled over and they weren't regarded as restructured loans. They were just regarded as a loan in the normal course. There was no separate segregation of restructured loans in the analysis that we saw from any of the banks.

So there was no analysis done then of, for want of a better expression, the deterioration of loan quality?

Mr. Aidan Walsh

There was analysis of deterioration of loan quality. A lot of very statistical information in respect of mortgage books and smaller commercial loans in terms of the development from compliant to maybe missing a payment or missing several payments. There wasn't that same statistical analysis for the larger lenders. They were dealt with on a case-by-case basis.

Okay. In all your engagements and you mentioned various meetings where all these agencies were in the room and so on - the Minister for Finance was at most, the Taoiseach was at one - who chaired those meetings?

Mr. Denis O'Connor

Kevin Cardiff.

Did the Minister speak much or listen?

Mr. Denis O'Connor

Mainly listened.

Okay. Did the Taoiseach make any interjections at the meeting he attended?

Mr. Denis O'Connor

He listened.

He just listened. Okay. Was there any agenda being pushed by the chair or by the politicians that were present at various meetings?

Mr. Denis O'Connor

I didn't feel there was any agenda being pushed.

Okay. Was it a sense that look, "We're all in here to try and come up with", as you in your own words, "we're going to have one chance at this, let's get it right", and that there ... was there an openness around that so there was no agendas from any quarter, was there?

Mr. Denis O'Connor

I didn't feel there was any agenda. I thought it was totally open and totally all in the same boat to get it sorted.

Okay. Was there any indication that the view of the room or the consensus in the room was being passed by a higher authority, say, in the ECB or the EU Commission or ... was that discussed or mentioned at any stage by anybody?

Mr. Denis O'Connor

There was always an overhang that we had to get it through the ECB, get legislation in place. A box had to be ticked. It wasn't a simple answer of just implementing plan A, B or C. There was a system to go through and that was always factored into the equation.

Yes, like, what system? I mean, in terms of "Let's guarantee, let's not guarantee, let's have a partial guarantee, let's issue more shares", I mean, what's the system that you have to go through for the ECB?

Mr. Denis O'Connor

Well there was the concern would a plan be state aid? Can we put money into this bank without it being state aid?

Well that's more the Commission that the ECB, isn't it, in terms of state aid?

Mr. Denis O'Connor

Well whatever it was ... to come back to your first question, was there an open agenda, there was an open agenda but there also was ... we had to make sure we ticked all the boxes to get it through.

To get it through, that's ... I understand that from a state aid perspective and that would be the Commission but was there any view that apart from the state aid aspect, that ... was there any ... "God, you know, the ECB won't wear that" or, you know, a suggestion that maybe the ECB had particular expectations and particular views about how these ... about the outcome of what was going on in your room when you were all doing your best to come up with the best way?

Mr. Denis O'Connor

I don't recollect that being an issue.

Okay. You said to Deputy McGrath earlier on that there was no examination ... that it wouldn't typically be expected of auditors or it wouldn't be kind of best practice to go into the kind of cross-collateralisation of individual loans and to assess that, for example, the equity that you thought that was there and now it wasn't there because, you know, that just isn't the done thing in terms of auditing. Would you say or would it be reasonable to say that, in hindsight, the best practice of real time, you know, is flawed and that perhaps-----

Mr. Aidan Walsh

Could I maybe make an observation on that?

No, but it ... just ... I think that maybe you should, and I think the Chairman alluded to this, would you say that some of the recommendations to be considered by this inquiry should be that, look, really, you know, auditing is ... one of the lessons of this whole process is auditing of the focus of organisations like yourself that operate to the highest standards of the day need to change and be more penetrative in their examinations of issues such as this?

Mr. Aidan Walsh

Can I just deal with the problem of the equity not being there? Part of that problem existed because there wasn't visibility across different banks and we had a very privileged position at the time in terms of getting an oversight across those six banks, but we actually didn't have any visibility into two other significant banks in the system at the time. So even the work we did didn't give us full visibility of what might have been going on with those top 20, 25 borrowers. We didn't see into the Scottish banks.

And would you say that there's a need then in legislation to put an onus on financial institutions or individuals to declare such things in the future?

Mr. Aidan Walsh

I ... absolutely and I think that's one of the recommendations that's being pursued at the moment in terms of a credit register.

Okay. Thank you very much.

Thank you very much, Senator. I'm going to move to wrap up, three minutes each. Senator Barrett.

Thank you, Chairman, and thanks to again to our visitors. On page 5, the losses and the scenarios - that's in our core volume - you mentioned you'd gone as high as 45%. Was 50% or a higher number considered?

Mr. Denis O'Connor

I can't remember today whether ... what numbers would be considered but, at the end of the day, the consensus was we'd provide 15% per annum over a three-year period.

And in those discussions, who would've been pushing for higher numbers and who for lower numbers, say, between the Central Bank and the Financial Regulator and the NTMA and the Department of Finance?

Mr. Denis O'Connor

I can't remember anyone approaching a particular ... you have to ... like, some of the issues here in land and development, some of these lands and developments were acquired in 2000 or 1995, so they were already on the books for a long period of time.

So nobody had more input into those ranges than anybody else at the meeting, that you can recall.

Mr. Denis O'Connor

Not that I can recall.

Could I just have one other quote in the written submissions to us by Professor Niamh Brennan. She says at 7.13, "Accounting is highly judgemental". I'll just give you the quote if I may:

Many observers of the banking crisis will wonder how bank financial reporting turned out to be so wrong. The problem with almost all accounting information is that, while it has the appearance of precision and accuracy, it is the product of extensive subjective judgements. Most non-accountants do not understand the extent to which accounting is a matter of judgement. Bank financial statements were, with the benefit of hindsight, flawed. The judgements behind the accounting numbers were too optimistic. Specifically, receivables from customers were overstated because they did not reflect people’s inability to repay their borrowings which subsequently came to light.

How would you react to Professor Brennan's submission to us?

Mr. Denis O'Connor

Well, the main point is that the auditor looks backwards. He can only make a provision if a condition exists at the balance sheet date. Sorry, the company can make a provision if the condition exists on the balance sheet date, the auditor will report on that. If a company had provided for losses that were going to happen in two or three years' time the auditor would not allow that to go through. So that is the issue more than anything else.

You say in your own-----

Final question now, Senator.

-----submission on page 8, I think it's about the third last paragraph, that "Changes have been made since but, nonetheless, [those] were the prevailing rules and notwithstanding one's view of their fitness for purpose, they were required to be applied." Is that what has us investigating the €64 billion, do you think, relentless applying of rules which we now see were flawed?

Mr. Aidan Walsh

Could I just offer a view, that I think the problem-----

I think that was Mr. O'Connor's, but never mind, yes, thank you.

Mr. Aidan Walsh

I think the problem is not in the accounting. The problem is in the judgments in relation to the lending.

Okay, thank you.

Thank you very much.

Deputy O'Donnell, three minutes to wrap up and then we'll conclude.

Can I refer back to Vol. 1, page 5, and can I direct Mr. O'Connor and Mr. Walsh to scenario analysis, scenario 1 and scenario 2. Am I correct in saying that ... is scenario 2 the higher case scenario? Is scenario 1 or 2 the worst-case scenario? I know they don't want to use the worst-case but just-----

Mr. Denis O'Connor

Scenario 2.

Scenario 2. The commercial corporate, you've ... speaking ... you've looked for a 1.5% reduction per annum in scenario 1 and a 1.25% in scenario 2. Why are you taking a lower reduction in scenario 2 rather than scenario 1 for the corporate?

Mr. Denis O'Connor

It was felt at a meeting that it was unrealistic to jump everything up.

Mr. Denis O'Connor

It was felt at the meeting we were at, where this ... numbers were discussed, that it was unrealistic to increase everything.

But you put a 4% reduction over three years, which is only about 1.25% per annum, more or less, there or thereabouts, and the commercial corporate made up the bulk of the majority of the loans. So how could you do a scenario 2 look at ... that you have a smaller reduction in the value of commercial property, rather than scenario 1, when scenario 2 was supposed to be the more worse-case scenario? What's the logic of that?

Mr. Denis O'Connor

Because we're looking at it in total, not individual components of it.

But corporate commercial lending was the majority of the lending; particularly certainly in the Anglo case it was the majority-----

A question please.

The question I suppose I want to ask is that commercial property was falling in price from, really 2007 into 2008, well above the 4%, and the two questions I have are the logic for using 4% against a backdrop of real time where the fall in commercial property was higher, and secondly, if you had taken a realistic figure would the banks, and would Anglo Irish Bank, have required capital?

Mr. Denis O'Connor

I will start to answer and you can come in. The ... as I said, the group of people around the table agreed that these would be the two options we would use. All these assets were income-generating assets at this point in time. They all had tenants in them. They were all generating income. There was no reason for to provide for them in-----

Yes, but, Mr. O'Connor, the viewpoint would have been that scenario 2 was a worst-case scenario when, in fact, in terms of commercial property you've actually gone for a lower reduction in the value ... fall in the value of commercial properties in scenario 2 rather than scenario 1. It, kind of, doesn't appear to be logical in terms of analysis ... a base of analysis.

Finish now, Deputy. This is your last question.

Is it logical on the basis? It's a critical point, Chairman.

Yes I know, but you need to ask the question properly. That's why it's critical. Ask the question and we'll wrap up.

The question really I suppose I want to ask is: you used a figure of 4% for a fall over a three year period when the fall over that period was of the order of over 60%. Property was already falling well above 4% alone in 2008, and when you looked at a worst-case scenario you actually increased the value of commercial property rather than reduced it, so the logic why-----

A question please, Deputy-----

What was the reason for that?

-----because I'm wrapping up. Mr. Walsh, Mr. O'Connor, please.

Mr. Aidan Walsh

Can I just point out at the bottom of that page 5, the bottom right-hand comment shows the make-up of the variance between scenario 1 and scenario 2, and it says that:

The move from PwC Scenario 1 to Scenario 2 is driven by impairment increases of €907 million on development land without planning ... and [€1.6 million ... billion] in relation to development land. This is offset by reductions of €446 million from commercial / corporate and €7.5 million ... unsecured consumer lending.

So the reader could see from that analysis that's written into the report what the impact of those individual changes were, and in the context of the exposures, I take from that that the impact of development land with and without planning permission far outweighed any movement on provisioning on commercial and corporate lending.

But the final question, if-----

Deputy, you're out of time.

Yes, but sure, Chairman, it's-----

Hang on a second please Deputy-----

-----the critical question in this-----

Don't interrupt me please, Deputy. I'm going to run this tightly today. People will have specific time to prioritise their questions. It's not that, "I have another question"; it's not "Columbo", where you've just one more question before I go out the door. You ask your question in the time you're allocated. Deputy, I'm going to give you a bit of time, but from here on out, that's the way it's going to be.

Chairman, it's a very straightforward question, and the question is: ye are a world-renowned accountancy firm and professional advisers. Ye went for a 4% reduction on average in commercial property over a three-year period between '08 and 2011, when commercial property went down in reality by 60 ... over 60%. When you looked at the worst-case scenario, scenario 2 rather than scenario 1, you actually reduced the reduction in valuation from 1.5% per annum to 1.25% per annum.

And looking back now, in hindsight, were those figures grossly understated?

Mr. Denis O'Connor

Deputy, I'll say at the start that these figures were agreed with by a number of people and the-----

Agreed with by whom, Mr. O'Connor?

Sorry, Deputy, I'm moving on. I'm closing things up.

Sorry, just let Mr. O'Connor finish.

No, please, no. No. You have been afforded more time than any other member-----

No, but I'd like to hear the answer, Chairman.

-----on the committee today in regards to this engagement. Mr. O'Connor, Mr. Walsh, do you have anything further you'd like to add to that question? The question has been made, I'm not re-entering the question again.

Mr. Aidan Walsh

Nothing further to add.

Mr. O'Connor, do you have anything you'd like to add to it?

Mr. Denis O'Connor

I'm fine thanks. No.

Okay. I just want to return to two items and then I'm going to wrap up. Were there any ... and it comes back to your own evidence earlier today, Mr. O'Connor, in regard to the solvency of Anglo circa September '08 and were there any discussions on solvency/insolvency in your meetings at that time?

Mr. Denis O'Connor

Not that I can recollect.

Okay. You've no recollection of any solvency being discussed.

Mr. Denis O'Connor

There were no discussions on solvency at that time, no.

Okay. And would you have any views on whether the Irish State should have been engaged in the protection of insolvent banks?

Mr. Denis O'Connor

I don't have any views.

Okay. All right. I'm going to wrap things up. Mr. O'Connor, Mr. Walsh, in thanking you to be here today I'd like to invite you, if you have anything you want to say by closing remarks, additional comments and so forth.

Mr. Denis O'Connor

No, I'm fine thanks.

Okay. Mr. Walsh?

Mr. Aidan Walsh

Thank you for your time today.

Okay. With that said, I now propose that we conclude this session. In doing so, I'd like to thank Mr. Walsh and Mr. O'Connor again for their participation and engagement with the inquiry. Both witnesses are now formally excused and the meeting will suspend until 12 noon. Is that agreed? Agreed.

Sitting suspended at 11.42 a.m. and resumed at 12.05 p.m.

Department of Finance - Professor Alan Ahearne

Okay, with that said, we'll commence with session two, is that agreed? Agreed ... with our public hearing with Mr. Alan Ahearne, former special adviser to the late Minister for Finance, Brian Lenihan, TD. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? We continue our hearings today with Mr. Alan Ahearne, former special adviser to the late Minister for Finance, Brian Lenihan, TD. Alan Ahearne is a professor and head of economics at the National University of Ireland, Galway. He was a special adviser to the late Minister for Finance, Brian Lenihan, from March 2009 to March 2011. He advised the Minister on economic, budgetary and financial policy in responding to the economic and financial crisis and played an advisory role in relation to the national recovery plan and the creation of NAMA.

Mr. Ahearne, you are very welcome before the committee today.

Professor Alan Ahearne

Thank you, Chair.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given.

I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. The utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis and I will now ask the clerk to administer the oath to Mr. Ahearne.

The following witness was sworn in by the Clerk to the Committee:
Professor Alan Ahearne, former Special Adviser to the Minister for Finance, Brian Lenihan, TD.

Once again, Mr. Ahearne, I welcome you before the committee this afternoon and if I can ask you to make your opening remarks to the committee, please.

Professor Alan Ahearne

Thank you, Mr. Chairman. As you mentioned, Mr. Chairman, I served as special adviser to the late Minister for Finance, Brian Lenihan, from March 2009 to March 2011. In this role, I advised the Minister on economic, budgetary and financial policy in responding to the economic and financial crisis. Among other things, I played an advisory role in relation to three budgets during the period, the national recovery plan, the creation of the National Asset Management Agency, NAMA, and other measures to address the financial crisis. The three budgets during this period involved €15 billion of fiscal adjustments at an annual rate. These adjustments were aimed at reducing the Government's huge structural deficit, thereby restoring order to the public finances. Reducing the structural deficit, by definition, required discretionary measures as the structural deficit would not decline due to a cyclical recovery.

In dealing with the consequences of the bursting of the bubble for the Irish banking system, the Minister's focus was on stable ... on restoring financial stability by restructuring, recapitalising and deleveraging the banking sector. The Minister regarded the two main banks, AIB and Bank of Ireland, as core retail banks that would play important roles in Ireland's economic future. The banks required capital to remain in operation. The banks' capital positions were being eroded by loan losses and, therefore, the banks required recapitalisation. The Minister wanted to minimise the burden on the State of ensuring that AIB and Bank of Ireland were properly capitalised. For that reason, he afforded the banks the opportunity to raise private capital through, for example, rights issues involving shareholders. Ultimately, Bank of Ireland was successful in finding private sector solutions.

In the case of Anglo, the priority was to deleverage and de-risk the bank without damaging the rest of the banking system. The Minister had an open mind as to whether a small good bank could be carved out of Anglo, as proposed by the bank's management. Anglo had been included in the blanket bank guarantee and, therefore, the Government had to recapitalise Anglo to avoid a call by creditors on the guarantee. Moreover, Anglo required injections of capital to retain its banking licence and thereby maintain access to Central Bank funding.

In relation to the cost to the State of recapitalising the banks, the upfront costs were large by international standards. The Minister was confident that the State would recoup some of these outlays and wanted to spread the cost of the crisis over as long a period of time as possible. It's worth noting that although the cost of recapitalising Anglo and INBS added markedly to measured Government debt - about €35 billion - the way in which Anglo was recapitalised meant that the burden of servicing this debt is relatively low because the debt is largely held within the State sector, is long-term and can currently be financed in the market at a very low rate.

On the issue of right-sizing the banks, NAMA was established by the Government to help deleverage and de-risk the Irish banking ... the Irish banks. Asset management companies like NAMA have been used in many countries over recent decades during financial crisis to facilitate bank restructuring and to manage and dispose of troubled assets. Regarding the overall effectiveness of NAMA, in my testimony before this committee on 4 March last, I noted the assessment of NAMA in an independent study of the agency. On page 2, the study states, "First, the establishment of the bad asset agency, NAMA, serves as an international example of [the] successful management of bad assets." On page 24, the study states:

The establishment of NAMA was instrumental in the successful management of the Irish banking crisis. It allowed the banks to recognise fully the losses on these loans, and thus removed an important source of uncertainty for the banks. Next, the government set only overall targets for NAMA in [the] resolution of the bad assets. The relative freedom in running down the bad loan portfolio allowed NAMA to realise a relative good price for its assets disposals.

Also on the same page, the study draws a key policy lesson for other countries:

Ireland followed international best practice by setting up NAMA, [an] asset management agency to run down the bad assets of the Irish banks. Releasing bad assets from bank balance sheets is instrumental in the path [of the] recovery.

I share the study's view that the establishment of NAMA played a critical role in restoring financial stability in Ireland. I would note, however, that an asset management agency is not and cannot be expected to be a magic bullet to solve a banking crisis. No single policy measure on its own can do that. NAMA has been part of a set of policies that, together, have helped to restore order to the Irish banking system and contributed to the recovery in the Irish economy.

Notwithstanding the efforts to restore international investor confidence in Ireland and its banks, during the second half of 2010 the cost to the State of borrowing on international markets rose to unsustainable levels. Around the same time, funding in debt markets for the Irish banks dried up and the banks experienced large outflows of deposits, especially corporate deposits. These outflows replaced by borrowings from the euro system. The ECB and the Central Bank of Ireland provided invaluable liquidity assistance to the Irish banking system during the crisis. I believe, however, that the ECB in 2010-2011 underestimated the systemic nature of the crisis in the euro area. The ECB was overly anxious in the latter part of 2010 to reduce the amount of emergency loans that the euro system had extended to the Irish banking system. There are also question marks about the ECB’s communications with markets about individual member states. With no access to markets at affordable rates, the Irish Government was forced to borrow from the official sector. The EU-IMF-ECB programme of assistance provided the State with funds that were needed to finance the budget deficit and provide a functioning banking system.

Finally, Mr. Chairman, the large gains in international competitiveness recorded by the Irish economies ... Irish economy over the 2009-2010 period went a long way to creating conditions in the economy for key sectors of our economy to grow, gain market share and expand employment. Without these gains in competitiveness, the Irish economy would not be registering the fast growth rates that we see today. Thank you, Mr. Chairman. That concludes my prepared remarks.

Excellent. Thank you very much, Mr. Ahearne, and if I can now invite Deputy McGrath to open the questions, please. Deputy, you've 25 minutes.

Yes. Thank you, Chair. Mr. Ahearne, you're very welcome this afternoon. Can I start by referring to your reference on page 4 of your witness statement that the late Minister Brian Lenihan had decided in autumn 2010 to wind down Anglo? So can I ask, what advice, if any, did you give to the Minister at that time to support the decision because, in parallel with that, the then management of the bank were actively lobbying to have a good bank-bad bank split and to try to carve out a new business from what remained of Anglo? So what was your advice at the time?

Professor Alan Ahearne

I guess for ... for all the time that I served in the role as adviser, I was sceptical that a good bank could be carved out of ... out of Anglo. I felt that its ... its business model - which was large exposure or large lending to commercial property - that that would no longer be ... be viable. The management had talked about a new sort of a small business bank but I was sceptical about that. I think the Minister was open-minded on it. I never recall him being enthusiastic about this proposal. The proposal to carve out a small bank came from the management. The Minister felt that ... the argument was put to him that this carved-out small new business bank ... it might be worth something and therefore it might save the State a few billion in terms of the net costs of the banking system. So that obviously got his attention. He was aware that ... that we were going to need more competition in the banking system, so the idea of another bank being there was somewhat helpful. So any interactions I had with him, he was open-minded on it, but I never remember him being convinced one way or the other. So he wanted to give it ... this proposal a shot. It was being sent over to the European Commission for approval and back. I was seeing all these ... this documentation and I think what happened, as we got into September ... August and September, is that the European Commission had gone very cold on this plan and the Minister felt that it just ... just wasn't going to work.

And in your view, what would have been the consequences of going for the other option of trying to carve out a good bank from Anglo? And what would've been the ... the operational factors in that decision?

Professor Alan Ahearne

Well, the bank would've needed some capital but, again, if you thought that there was some value to be ... to come out of it, then there was an argument for giving you the capital ... the couple of billion of capital. I guess the issue was the reputational damage to this bank - whether it would ... it had a ... it would've had a franchise at all. The management felt that it could, that they could get something new out of it.

They’d even come up with a new name, "An Banc Nua", but I just didn’t see ... it would be the old Anglo, and I couldn’t see how it could play a role. Also, banking is about expertise and lending experiences. The expertise that they would have had would largely have been in lending to commercial ... in often the case, highly speculative properties so I just didn’t see how this would ... how this would fly.

Sure. And when the decision was announced then in early September 2010 to separate it into a funding bank as such and a recovery bank, what was the anticipated timeline for the overall wind down of Anglo was it going to 2020 at that stage, was that the plan?

Professor Alan Ahearne

I think, I mean, we would have been in and out by ... but I think it was certainly over a long period of time, it was eight to ten years. The problem with ... it had a large amount of assets, loans. It’s ... if you try to sell loans, deleverage very quickly, you have to take big haircuts on those loans, if you can find a buyer at all. And if you’re taking big haircuts you’re adding to the losses so the Minister was conscious that in deleveraging, particularly in an environment with very little appetite for Irish assets, you would have to be very careful and do it over a long period of time.

So a short-term liquidation was not considered as a viable option at that time?

Professor Alan Ahearne

No, that would have been viewed as too costly in the environment at the time. The point of having the funding back was, while Anglo did have ... did have some funds, it had some deposits, it did have ... it was able to raise funds ... and the Irish banking system as a whole needed funding, private funding. So the plan was to try ... how can you keep funding in the system, that funding that they had access to, without having a bank that can lend, and that was the argument for that particular split.

Okay, if I can take you to November 2010 and the negotiations with the troika for the bailout. Ann Nolan of the Department of Finance stated in her witness statement to this committee that IMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo. This was opposed by the EU and ECB officials. In the event, she said the matter was considered at a more senior level in the IMF, and you have said this as well, as a result of US Treasury veto the IMF came down against any such action. Can you elaborate on what happened at that time and was it a live issue being considered in the build up to and during the negotiations ... the burning of the unsecured senior bondholders in Anglo?

Professor Alan Ahearne

It was a live issue. I mean, I had many conversations with the Minister during the summer of 2010 on the issue of senior bonds, particularly in Anglo because ... now there was no intention of doing anything while the guarantee was in place but the guarantee was going to run out in end-September. And then some bonds in Anglo and some of the other banks would there ... were therefore going to be exposed, they would no longer be guaranteed. So we talked about what could be done with those banks and whether there was room, scope for bail-in or burning those bonds as people say.

I mean, initially I think the Minister wasn’t particularly enthusiastic, he saw lots of problems with that and there were problems, market problems, legal problems, and he saw all those. But as time went on during the summer he sort of came to the position, came around to the position that in principle this would be a good idea. I mean, at one stage I remember, maybe in August or September, he even came up with some numbers. He was talking about senior unguaranteed bonds after the guarantee had gone, those bondholders taking a haircut as he put it of 50%. I mean, I remember a conversation when he begun with the line “The bondholders are going to have to take a haircut.” He had numbers – 50% for the Anglo, he had smaller haircuts for AIB, 20% or something like that, and then with Bank of Ireland at one stage he mentioned maybe 5% then he said, “Then it’s probably not worth doing it.” So we’d exclude that bank. So the focus was really on Anglo. INBS didn’t have many bonds but that was probably thrown in there as well.

I went to the Washington DC with him, because you mention the IMF, in early October and I met with a couple of IMF officials, I think one of whom you’re meeting tomorrow. And they brought up ... we had some discussion with the Irish and they brought up, they said “Is the Minister aware that there’s about €4 billion of Anglo bonds that are now unguaranteed, senior non-guaranteed?” I said he is aware of that and he was aware of that. They said “It’s a lot of money”, and I said “He’s aware of that.” So it was clear from the short discussion I had with them at that stage that they had spotted this and they had these concerns.

That was October, is it?

Professor Alan Ahearne

That was in early October of 2010 that they were in their line of sight. It was also in the Minister’s line of sight. I use the word, mistakenly, “in principle” because it wasn’t that he gave an order at some stage, you know, on 30 September after the guarantee “Okay, let’s burn them.” It wasn’t that but he, in principle, if the opportunity arose, if it could be done, he did want a haircut of these bonds. He was very concerned about the market reaction, how that would spill over into the sovereign debt market. He was getting strong advice from the NTMA that announcing that there was going to be a burning of senior bonds would have a very negative effect on the sovereign’s access and it would push up interest rates for the Irish Government. He wanted to avoid that, but of course that argument became moot when we got into a situation where Ireland was going to borrow from the official sector and that’s why that opened up that opportunity.

So what happened then during the negotiations themselves? The IMF on the ground here in Dublin during the negotiations was still supportive. Why did it not happen?

Professor Alan Ahearne

I mean, the Minister was pushing for, I think right up until – get my dates right – certainly the week of say 22 November – there was still a lot of work being done by the Minister and I think by officials on how we could do this. A lot of it was legal work because there were big legal issues involved. Later that week, or maybe the weekend, I was speaking with the Minister and he said there’d been a conference call, I think ... I understood it was a G7 conference call, but it may not have been, but it obviously involved sort of people at that level, and that it had been decided that the burning of bondholders had been vetoed. ECB was against it. That was relayed to me. The European Commission sided with the ECB and as the Minister put it, although the IMF staff themselves individually, and from earlier on had viewed this as a good idea, the organisation, at the executive level, took a decision not to do it and, therefore, ultimately the troika’s position on this was that there’d be no programme would be available if this route was taken.

And did it come down to that net point in the end that if Ireland had insisted on burning senior unguaranteed bondholders there would not have been a programme, there would not have been financial assistance?

Professor Alan Ahearne

Yes, I mean, it was ... particularly the ECB’s approach was quite strident so there would not have been a programme. And, indeed, I mean, the ECB could have done many other things if Ireland had decided to burn senior bondholders of a bank. They could have said, “This bank is now insolvent, you’re burning the bonds therefore we’re not going to lend to it anymore.” So they could have said the collateral ... this bank is no longer eligible for euro system financing, in which case all the financing would had to have fallen on the State. So there was ... at ... if the troika were against it and the ECB were against it there was no option.

It’s also the case, at least we’re focusing on the Anglo, the amount of money involved was about €4 billion, from €3.5 billion or €4 billion. Brian Lenihan had in his mind 50% discount so you might say €1.5 billion to €2 billion. It’s a lot of money but you’ve got to balance that against the consequences. The ECB and the European Commission had their arguments and they put them out and there was a recent European Commission paper looking at, assessing the programme – I have it here – and they list eight or nine reasons why they believe at the time Ireland should not have burned the bondholders, and they still think Ireland shouldn’t. They said it was in Ireland’s best interest not to. So they’re making those arguments but the Irish side had a different perspective on it.

And at that time was it only the remaining Anglo bonds that were on the table in, let’s say, November 2010, and by coming out of the guarantee at the end of September there was total of about €19.5 billion that were unsecured and were now unguaranteed and Anglo as you say was about €4 billion to €4.5 billion? So throughout October and into November was it distilled down to the question of Anglo bonds or were the other ones not considered?

Professor Alan Ahearne

I think the IMF staff had, at least in their calculations, had produced the sort of numbers you have produced there. They had everything in.

Professor Alan Ahearne

But I think when the push came to the shove, I mean, as I described earlier, Bank of Ireland for example, the Minister was very reluctant to discount bonds in there. And I think in ex post rightly so because actually when you look at it the bank was able to raise private capital and recapitalise itself through subordinated debt. It’s not at all clear that senior bondholders in that particular institution should have been discounted. It’s certainly not the ... it’s certainly the case that they should not have been ... the losses from Anglo should not have been put onto senior creditors in Bank of Ireland.

So I think at one stage they may have had closure and given those sort of more general numbers, but I think in the heel of the hunt it came down to Anglo and INBS, which was much smaller, because those were banks that were going to be wound up and they were in a very ... a different position then. They weren't going to be issuing bonds in the future. It was easier to distinguish them from any other bank in Europe so ultimately it came down to them.

Okay. As you know, Mr. Ahearne, about €15.5 billion in total of losses were imposed on junior bondholders - subordinated bondholders. Much of this was done through liability management exercises where debt holders were asked to voluntarily sell their debt back to the banks at reduced price. Was that seen as being an entirely different issue to the senior bondholders at that time?

Professor Alan Ahearne

It was. I mean, I remember being in conversations - during the summer I think it was or maybe early autumn - in the Attorney General's office with several senior counsel. I am not a lawyer but just listening to the conversation, it was clear that it was much easier to put losses, legally, on subordinated bondholders than on senior bondholders. Subordinated debt, as I understood the conversation, is explicitly subordinated. So after all capital has been wiped out, you can then go to the subordinated debt and put losses on them. But senior bonds are not subordinated to deposits, for example. So, in a liquidation if you liquidated a hotel, you cannot treat the bill that is owed ... money owed to the launderette different from the money that is owed to the meat supplier. They are senior creditors. Unsecured senior creditors all treated equally and that was the position of the senior bonds. They were pari passu or equal in the eyes of the law to depositors ... much more difficult game. Now, maybe it can be done but it was clearly a much more complicated operation.

The promissory note structure that was put in place back in 2010, can you explain the logic behind that structure at the time - an overall commitment of over €30 billion, over €3 billion to be paid every year for ten years or so? Can you explain why that structure was put in place and what, in your view, were the advantages of doing it that way from the State's point of view?

Professor Alan Ahearne

I mean, assuming that money ... the bank had to be recapitalised, otherwise the guarantee would have been called in and the bank would have lost access to ECB funding. The issue is how do you put a large amount of money in, let's say, €30 billion. One way to do it is to put cash in. I mean that was done through ... AIB and Bank of Ireland were recapitalised with cash from the National Pensions Reserve Fund. There wasn't enough cash. So, the Minister could, in theory, have asked the NTMA to go out and borrow cash, issued Government debt and whatever interest rate prevailed at the time - ten-year money might have been 5% or 6% - borrow that money and put the cash in. A much, much cheaper way of doing it was to, rather than put cash in, to give the bank, Anglo, Government debt and that, whether it was regular Government debt or promissory note, it is all IOUs. Because, that way, Anglo could then go to the Irish Central Bank, present that piece of paper and borrow money on the back of it. That meant essentially that ... so the debt was not being issued into the market. The interest rate that was being paid on the promissory note was being paid to Anglo but Anglo was part of the Irish State as just an internal transaction. Anglo was paying interest to the Irish Central Bank on its borrowings but the Irish Central Bank is part of the State. All this stuff is simply internal. The cost to the Irish State of that recapitalisation was, if you go through it and get down into the weeds, the cost was the cost of funds to the Irish Central Bank borrowing from the Eurosystem and that was extremely low - it is currently zero. So the point was, this allowed Ireland to recapitalise this bank but the burden, the annual burden - the interest rate which is what really matters - was going to be extremely low. And that was the advantage of the promissory note system.

But the State would still have to come up with the cash of €3 billion every year - every March.

Professor Alan Ahearne

So the difficulty with it was ... I mean, people ... when the promissory note was restructured, a lot of people said, "The expensive, high-interest promissory note is being restructured." Well, that's a misunderstanding. The interest rate of the promissory note was irrelevant. The interest rate was being paid to Anglo. It's just one arm of the State to the other. The promissory note was an extremely cheap way of financing it. The problem with it, it was going away, it was going to be replaced every year by €3 billion of money borrowed in the market. So it wasn't that this was an expensive ... it was a really cheap arrangement but in seven or eight years' time it was gone. So, the trick was how could you keep that cheap arrangement in place for as long as possible and that's what the promissory note deal did. The Irish Central Bank currently owns these bonds. The interest paid goes to the Irish Central Bank. Look at the profits the Irish Central Bank is turning over to the Irish State. That's all internal. So this was a very cheap way of financing it.

€30 billion is a huge number but if I told you that you were going to finance €30 billion over 100 years at a zero interest rate, then it's irrelevant, it's for free. So the point is, when you're talking about national debt like that, you have to look at ... it's not just the amount, it's the maturity and the interest cost. And so the key to the way Anglo was being done was to get the cheapest possible finance and you can't get any cheaper than the ECB. It created issues because the ECB then, particularly as the amount increased in the autumn of 2010, were worried that this was monetary financing, essentially that the Irish Government was borrowing at a very cheap interest rate but it was happening through the banking system.

Sure. How did Minister Lenihan react to the letter from Jean-Claude Trichet of 19 November 2010, which really left nothing to the imagination that emergency liquidity assistance would only be maintained if the Irish State applied for a bailout?

Professor Alan Ahearne

I mean, I think it put in writing what had been said already. It wasn't that this was a complete shock. Maybe it was a surprise but what was a surprise was why this was put in writing. But that message that the ECB wanted Ireland in a programme, that the ECB was desperately unhappy with the amount of money it was lending, it wanted its money back, it wanted Anglo, which is the money we're talking about - the €40 billion that had been lent in ELA - it wanted the Government to pay that back by borrowing from somebody, either from the markets or from the troika. So it wanted Ireland to replace extremely cheap money through the promissory note arrangement with expensive money and Brian Lenihan said, "That's completely ridiculous. This is ... How is this going to solve our problem?" I don't remember talking ... explicitly asking him how he reacted to that but it put very starkly the ECB's view on Ireland at the time.

In the article you contributed to the book on Brian Lenihan: In Calm and Crisis, on page 25, you mention that Mr. Lenihan discovered that senior people at the ECB were briefing market sources that the ECB was considering the withdrawal of financial support to Irish banks. So again, this would have been in November 2010. Can you elaborate on that? What was he hearing? What was he referring to there and what impact did this briefing have, which Governor Honohan has acknowledged, when he came before the committee here, did happen?

Professor Alan Ahearne

So in August, I guess, and certainly in September and October, there was a huge amount of international investors or potential investors visited Ireland. These were people involved in pension funds and insurance companies who would be buying ... you would like to be buying Irish Government bonds, who may have done so in the past, potential ... people who would potentially lend to the Irish Government. Now, I met a lot of these people - they were very interested in the Irish economy and developments and stuff like that - and quite a lot of them brought up the point that the ECB appears to be hostile to this lending that it's doing - the ELA that's growing. And I remember somebody, one of them, saying to me - and again this somebody I'm trying to convince that they should lend to the Irish Government at reasonable interest rates - they said, "What are you going to do when the ECB pulls the funding from your banks?" They were talking about the Anglo stuff, in other words, forcing the Irish Government to go to the market to raise €40 billion, which it couldn't possibly do. And I said, "That's not going to happen." And he said, "Well, excuse me, I was in Frankfurt [I think that's what he said] yesterday and I met ECB officials and they told me that's what they are considering, so how do you answer that?" Now some of this was in the papers in the sense that ... I mean, they had, in early October, began to tighten up on liquidity. They had loosened things during the global financial crisis and they had begun to tighten things up - that was public. But it was clear that potential investors, whoever they were talking to, were being told that they want ... they're not happy with this and they're considering doing something about it, which would force the Irish Government on to the market to raise €40 billion.

Okay. Can I raise the issue of NAMA, Mr. Ahearne? And you have addressed it in your witness statement and you are strongly supportive of the NAMA project. But can I put a counter-argument to you, that the NAMA project crystallised immediately losses of €42 billion on the books of the banks, which triggered a massive round of recapitalisation? Subsequently, NAMA sold on the assets at market prices, which were at the lower end of the market, predominantly to US private equity funds or so-called vulture funds, who are now flipping those assets and selling them on for gains. Would it have not have been better to let the banks work their way through the assets at that time?

Professor Alan Ahearne

I mean, crystallisation ... one person's crystallisation is another person's facing up to reality. And what they ... what NAMA forced and the sales forced the banks, the bankers and everybody else to do was face up to the reality of what had happened. I guess if ... let me make a couple of points. One is that the banks would have needed capital to cover those losses in any event, because there was stress tests being done - stress tests done, various PCAR rounds - and, ultimately, there was the comprehensive assessment, which is the stress test done by the ECB. And even if the loans had stayed on the banks - the books of the banks - they ... those stress tests would have seen potential losses in those and, therefore, the banks would have been required to have capital. So, it's not that the removal of the loans caused the banks to need capital, the fact that there was huge losses on those loans, irrespective of whether they stayed on the books or not, meant that the banks needed huge capital in order to cover those losses, in order to-----

Final question, Deputy.

Yes, but it meant that those losses had to be fully recognised at the bottom of the market.

Professor Alan Ahearne

Well-----

So, okay, the losses were there vis-à-vis the actual value of the assets.

Professor Alan Ahearne

Yes.

But if they had been allowed to work them out over time, as opposed to NAMA doing it, then the outcome may have been different.

Professor Alan Ahearne

Well, look at the aggregate numbers. I mean, if NAMA was about to make or expected to make a profit of €20 billion, or surplus - it's not a profit-making institution - a surplus of €20 billion, then you might have an argument there. You might say, "Well, they clearly underpaid these banks for these assets. Look at the huge profits or surplus they are about to make." And, by the way, most of the arguments at the time were not that the fears, concerns that NAMA was going to underpay, but they would overpay. But my understanding - and you've had NAMA in front of you - is that they more or less expected to break even or that they would make a small surplus. That would suggest to me that they more or less got the pricing right, that the value they paid was the value of the loans and, therefore, what happened is that the banks simply were forced to face up to what was reality.

Thank you. Deputy, I will bring you back in again. The next questioner is Deputy Eoghan Murphy. Deputy, 25 minutes.

Thank you, Chair, and thank you, Mr. Ahearne. You are welcome back to the committee. I just want to stay with NAMA, if I may, because in your opening statement you suggested it was unfortunate that the details of the final tranche of loans, the transfer to NAMA was not available prior to the PCAR figures being announced, but you also said that the "subsequent upward adjustment made in September 2010 contributed to the weakening of investor confidence in Ireland around this time". So, are you saying that the NAMA process contributed to our need for a national bailout?

Professor Alan Ahearne

No ... I mean, the way you put it there is far too stark. Ideally, the loans would have moved in one go and there would have been a price given and, therefore, the Central Bank, in doing its PCARs in the March of 2010, would have seen that price. And, therefore, a line could have been drawn over how much capital the banks needed for those particular assets. Now, the banks needed more capital for different assets, but at least for those.

The reality is, of course, that there was so many loans and, most importantly, the European Commission had set down rules by how these were ... how these would be priced and transferred, and they involved loan-by-loan transfers and due diligence and so that made for a slower process. So ... now, there were advantages to that in that doing that loan by loan allowed ... meant that the pricing was much more accurate and it allowed the State, through NAMA, to see the full picture. You could imagine in theory where a random sample ... a large random sample of loans is taken, they're priced and then all of the loans transfer at that price. That would be faster, but, of course, it would be more risky because you are only taking a random sample.

Was it weighed up in designing the process, this potential for the damage of drip-feeding information into the market about what was transferring across from the banks?

Professor Alan Ahearne

I mean ... I think the most important thing was that the EU Commission rules were out before NAMA was even announced, so they were following that. So, there was no issue of could we ... can it be done in a different way.

And the inability to get political consensus. I mean, to what extent did that delay the process and to what extent was that frustrating the efforts of the Minister and the Department?

Professor Alan Ahearne

I mean, I don't think it delayed things. NAMA was announced in April. From scratch, things were ... the legislation was written. I think it was announced. There was draft legislation put into the public domain in June or July and then legislation introduced. There was a Bill in September and it was up and running by later that year. So, given the size of the operation, given the size of the problem, that was fairly speedy. I think it took a lot of the Minister's attention and energy, the debate about it but ... look, this was a big ... this was a big policy decision and so, I think he understood that there was going to be a serious debate about it.

In the chapter you contributed on the book on Brian Lenihan, you wrote that Minister Lenihan learned that one of the banks, AIB, was covertly briefing against NAMA. At what level was this happening and what did those briefings involve? And were you aware of other banks doing this?

Professor Alan Ahearne

That was reported back to him, that some stuff was appearing in papers ... I can't ... what it were, but some stories about NAMA's going to bankrupt the country and this sort of stuff. I think he had a ... the press office had done some work to see where this had come from and he was informed that they believed, or somebody believed, that it had come from AIB, presumably from senior people there.

Was it the view of the Minister or the Department that the banks were actively trying to delay NAMA or interfere with its establishment?

Professor Alan Ahearne

That ... I think the view was that particular bank, which had big problems at that stage - much of it was still under the carpet - that that particular bank would prefer not to face up to the reality that they had made huge loans - speculative property loans - and there was going to be huge losses on it. So, I think he recognised that, yes, there was going to be opposition from certain bankers to the facing up of reality, but he was determined that people were going to face reality. He knew full well - I mean, I had discussed this with him - that the international evidence was that if you try to hide it, the costs don't go away, particularly the cost to ... the public cost, the cost to public finances or ... and to the citizens. They accumulate over time. It doesn't get any better, it gets worse and you have to face up to the problem, and he was determined to do that.

Did this opposition from certain bankers or banks ... did it interfere with or slow down the NAMA process?

Professor Alan Ahearne

No, I don't think so.

Thank you. You also write about, in your opening statement, about Professor Schoenmaker and the successes of NAMA. And you wrote about the relative freedom that the agency had to manage the assets. But, what about the lack of flexibility regarding the bond repayment schedules that were entered into on behalf of NAMA? Did this result in a rush to sell prime assets to meet these early repayment targets?

Professor Alan Ahearne

I mean, with an asset management company, there is always a tension between avoiding fire sales, but also avoiding hoarding. You want the asset management company ... you don't want them dumping all these assets onto the market at one stage, at one time, because there won't be enough liquidity there. If you are in a crisis and they have to sell them at very cheap rates, then they make huge losses. At the same time, you don't want them ... you don't want the asset management to be around in 20 years' time hoarding these. And that was the experience of the RTC, the Resolution Trust Corporation, in the United States. If I remember rightly, after a few years, Congress passed a law, kind of, forcing them to sell a bit more because it was felt that they weren't selling enough, that they were beginning to hoard. So, that's always a tension. It looks - and there are different reports that look at NAMA - it looks to me from the outside that that they probably got that about right. They were selling assets, but they tended to be foreign assets, often in the UK.

They were getting reasonable prices for those and therefore they were beginning, they were, they were paying off their senior debt. They held the Irish assets through 2011-12 but then there was a remarkable increase in the appetite for Irish assets over the last few years and they've sold into that. So by, by luck or by design, they seem to have, have got their timing about right.

So you wouldn't think there's an argument for trying to restructure the repayment schedule, given what we now know in terms of the rising value of assets? You know, because we talk about the initial costs of the bailout and then the potential for NAMA to reduce some of that cost direct through its work-----

Professor Alan Ahearne

Yes.

-----by selling assets maybe too early and not holding on to them long enough, the ability to reduce that cost further is restricted.

Professor Alan Ahearne

I mean, that's a judgment, that's an operational issue and a judge ... and a strategic issue for their board to judge when is the best time. I'm sure people have come in in the last few years and offered to buy the whole lot off them at a certain price, but the board have to make a decision about whether that's the best price or whether they could do better.

Okay, and then just the understanding in the Department as to the purpose of NAMA when it came to the actual developers, the people who had the loans, and what they were pursuing, because I'm just wondering did the targets change or was NAMA always meant to only be pursuing for the costs that they paid, or were they meant to be pursuing for the full costs the banks paid when it came to the developers?

Professor Alan Ahearne

I mean, when a debt transferred, that full amount of debt was owed to NAMA, and there was no sense in which NAMA was instructed to write off large portions of it, or just to chase the selling price value. No, there is still, the full amount was owed. Now, everybody knew that NAMA was not going to get back the full amount or anything near it. It was expected that what they would get back would be about the amount of money they had paid. After all, that is why they valued it that way. So, if they could get the full ... I mean I think €72 billion transferred for €30 billion, something like that. That was something like the numbers. If they could get the 100% back, the €72 billion, then we wouldn't have this inquiry because therefore there wasn't a bubble, all assets were valued properly. It was clear that there was a bubble, that assets were not valued, were not at the height of the bubble fairly valued, so there were going to be huge losses.

So that was, but, I mean, for example if there was a developer who had bought a field, and had a loan and the collateral on that was, I don't know, the field plus a bit of a pension fund, and that pension fund rose in value for some reason, and that pension fund would then be part of the collateral behind it, so that NAMA could go after that pension fund as well as the field if they ... so there was no sense of okay, "You've transferred this loan. It was originally €100 billion. It's transferred as €100 million and is now €5 million, therefore you only owe us €5 million." That was never the intention, and I don't, from what I know I don't think that has been the practice.

Okay, thank you. Just to move on then if I may, when you entered the Department, and what the sense was in the Department of the need for a bailout. When did that start to come into your view, as an adviser to the Minister, because we have from other evidence that it occurred to some people in the Department around the time of the guarantee, that something like that might be needed down the line, some sort of a cross-stream credit line at least? And we also have a conversation between Governor Honohan and Minister Lenihan in April 2010 where Governor Honohan says it to the Minister that we're next in line for a bailout after Greece and the Minister said "No, it would be Portugal". So at what point in the Department are you thinking "We might be in trouble here on the sovereign side"?

Professor Alan Ahearne

When I went in initially there was no discussion of the IMF, but when I went in initially our bond yields had, I think, moved above 5.5% and were heading towards 6%. There was huge outflows from the banking system. So, the risk that the country might not be able to fund itself, that was, that was a possibility. Now, I had no discussion with the Minister about that, but it was possible. The Minister, I know, did meet somebody from ... a retired IMF official, who gave him a sort of briefing about what a programme might look like if Ireland ever needed it and I think that briefing was sent, was e-mailed to me as well.

Professor Alan Ahearne

It could have been April 2009. In or around then.

Professor Alan Ahearne

Yes.

And he met with, was it a retired IMF official?

Professor Alan Ahearne

Yes.

Okay, and that was, do you know how that was initiated, that meeting? Was it-----

Professor Alan Ahearne

I don't.

But the outcome of that meeting was-----

Professor Alan Ahearne

It wasn't official. It hadn't come through the IMF.

Professor Alan Ahearne

It was just somebody who was retired, and decided to fill the Minister in on, you know, what a programme might look like. I knew what a programme looked like. I had followed countries that had been in programmes. As bond yields fell, things stabilised, that idea of turning to the, of needing official assistance just went off-----

When that meeting happened in April '09, a document came to you. Was that what you said, that there was a document?

Professor Alan Ahearne

Yes.

Was that document, was there any action taken as a result of that document? Do you know did it go to Department of Finance officials?

Professor Alan Ahearne

I don't believe so. I mean, the officials knew what an IMF programme. It sort of set things out, like, you will have quarterly reviews; you will be lent money, that sort of very basic-----

So it wasn't necessarily sketching out an Irish-specific programme.

Professor Alan Ahearne

Not at all. It was just a very basic lady book of what the IMF, what the IMF programme is about.

So did the Minister inform you of Governor Honohan's opinion in April 2010, that we'd be next for bailout after Greece?

Professor Alan Ahearne

No.

No, okay. Were you aware that the IMF had suggested to Governor Honohan around that time, in May it was, a precautionary line of credit for the country?

Professor Alan Ahearne

No.

This was in May 2010.

Professor Alan Ahearne

No.

No, you weren't included in those conversations. Okay. In relation to the bank funding cliff that was approaching in September 2010, did the Minister and the Department, were they, were they sufficiently aware of the seriousness of that situation?

Professor Alan Ahearne

Yes, I mean, they had the numbers.

Professor Alan Ahearne

We all had the numbers. They saw what was maturing. The ... I guess the view in, after the banking announcement in, at the end of March 2010, and in the weeks that followed, the Irish banks were actually able to, their funding had stabilised and they were actually bringing in, I think there was inflows of about half a million, excuse me, half a billion a week into the Irish banking system, where there had been outflows for the previous, in 2009, of a billion a week. So that at least had stabilised. The Irish banks were able to issue bonds. I think Bank of Ireland was able to issue some serious bonds, senior bonds. So the hope was that if things continued to stabilise that the banks would be able to raise private funding. It was clear they wouldn't raise enough private funding to get over the cliff, and therefore the Eurosystem, the ECB and the Irish Central Bank would have to help out temporarily, but if they had, in the months that then followed, they would continue to issue bonds and raise funds, and they would've been able to repay that. So the hope was that things would remain stable, and things would continue to improve, well they were improving marginally, but if they continued to do so, the banks would be able to get over that cliff.

And was there frustration in the Department on what was perhaps a delay on the part of the ECB, in terms of engaging on this issue, because Governor Honohan told us that he had to write to the ECB twice to bring it to their attention in the summer of 2010?

Professor Alan Ahearne

I don't remember anybody expressing frustration about it. There was some frustration with the European Commission about approving the guarantee, but no, I don't remember anybody saying to me about-----

Professor Alan Ahearne

-----frustration with the ECB over that.

Okay. Just staying with the ECB, in your opening statement you talk about them misjudging the systemic nature of the crisis, and you also talk about question marks about the ECB's communications with markets about individual member states. Could you just elaborate on, when you talk about that second point, about the ECB's communications with markets about individual member states, is that the discussion that you had with Deputy McGrath earlier, that those kind of conversations that you were having?

Professor Alan Ahearne

It is, yes, about how they were discussing with the markets what was going on.

Professor Alan Ahearne

Yes.

And, just then in relation to that, when it came down to the conversation about burden-sharing with bondholders, could it, could it have been a unilateral action on the part of the country? Is it not something that you don't announce, or you don't negotiate on, you do it, and then try and deal with it then? Was that at all part of the kind of calculations that the Department was making or looking into?

Professor Alan Ahearne

There was no scope for burden-sharing while the guarantee was in place, so this was forward-looking. I mean, I discussed this with a senior civil servant maybe from May onwards about the Anglo bonds, could they be discounted. At the time the plan with Anglo was to split it into a good bank-bad bank, and that raises the issue of what goes into the bad bank, what creditors, what funding goes in. You put the subordinated debt in of course, and that would expose it then, but you, in theory, could put the senior bonds in. Now you are splitting the depositors and senior bonds then so that had all those legal issues but at least that was, in principle, we discussed that.

Just when that window opened up - end of guarantee before the bailout negotiations - and the IMF are talking to you about a figure of €4 billion and Mr. Lenihan is thinking maybe 50% of that, was anyone saying let's just do this, rather than wait to be told that we can't?

Professor Alan Ahearne

I think the Minister certainly considered it, but as September went on, and our interest rates on, facing the State, on sovereign bond markets increased, then he became worried about the knock-on effects to the sovereign.

And the advice, clearly, from the NTMA was "Don't do this because it will push up your yields even more and you'll lose access to the markets and if you are pushing up the Irish interest rates as a heavier cost to the State and, therefore, any gain you are going to get you are going to lose". I mean, I was ... I remember he did an interview in New York in early October, maybe about 10 or 11 October, with, I think, the Financial Times, and I was sitting beside him and he said to them ... they asked him about the Anglo bonds and he said "Well, I'm not going to coercively discount them but the bank could do a liability management exercise and raise some capital that way, burn 'em that way. That's a voluntary ...". In fact, most of the subordinated debt that Deputy McGrath spoke of was done that way, done through voluntary ... a voluntary way. Not long after, I remember somebody from the NTMA - a senior official from the NTMA - showing me their BlackBerry and saying "Look at this, I'm getting e-mails from ... here's a headline, I think, from the Financial Times or from somebody, something like Ireland going to default". It was that sort of tone to it - "Look at this, I'm getting e-mails from the people we sell bonds to asking me is Ireland about to default". And I said, "Well, he didn't ... the Minister didn't mention anything about sovereign bonds, he was talking about bank bonds", and the reply I got was "It doesn't matter, look at the headline, this is creating problems". And the Minister said ... I remember the Minister saying afterwards "Okay, I realise I'm talking about burning senior debt and you're [the NTMA are] trying to issue senior deb". So, they're different debts but very difficult to do in an environment where the sovereign market is stressed.

And, just staying on that issue, just one last question. Do you recall any conversation between Kevin Cardiff and the ECB when - we're later into November now, this is negotiations and discussions - and the ECB had its own legal advice on whether it was constitutional for Ireland to impose burden-sharing and Mr. Cardiff retorted that, you know, we could have a referendum if we needed to. Were you there for that conversation, do you recall it?

Professor Alan Ahearne

He ... Kevin either said to me or else I read it in a memo. I thought that was somewhat later but Kevin's dates might be better than mine but I do remember that ... I think, reading it at the time in a memo that the ECB had said "We have got ... ", "Actually, this would be unconstitutional and we have got our own lawyers". And maybe - I'm not sure if it was written or whether Kevin said it to me afterwards but "This is the answer I gave them: "I'm sure if we put this to a referendum the Irish people would vote to burn Anglo bonds."."

Okay. Just finally, going back to October and I think it was in your travelling over to New York you wrote in a chapter with ... for the book on Mr. Brian Lenihan about a discussion you had with him about the euro and about possibly exiting the euro. We know from other evidence that there was a unit doing work on potential contingencies should we find ourselves outside of the euro or should a decision we take bring us outside. But was that discussion a serious discussion or was it just a chat that people have, you know?

Professor Alan Ahearne

I think Brian Lenihan's style was that he liked to consider all options. I mean, he wasn't willing just to ... if an official said, you can't do A, he'd want to know why can't you do it "Well, there's problems - X,Y and Z problems", "Well, is there a way around the X, Y and Z?". So, he was very open-minded and he wanted to satisfy himself that whatever route he was doing that that was the right route and that everything else had been considered. So, was it serious? It was never ... he didn't, sort of, again, order a big ... a plan to go ahead. It wasn't that but he wanted to kick the tyres of that particular out-of-the-box alternative route, as he did with many other things. And so I thought it was just a good way of doing policy making. He thought everything through, even things that were, sort of, real left field.

Okay. And you would characterise that as being real left field in terms of a possible option.

Professor Alan Ahearne

I would think so. He concluded - in many ways he is talking to himself - just thinking it through and he concluded ... and we spoke for several hours and he concluded that this would not be in the interest of the citizens of the country.

Did you give him any advice on it or was it-----

Professor Alan Ahearne

I mean, I wouldn't have been in favour of it either. So we just discussed a lot of the, sort of, economic issues to do with it "If you had your own currency would you peg it to sterling or would you become part of the dollar zone?", it was all that sort of stuff. It was just very broad discussion of alternatives.

Okay, thank you. The final section we are looking at, if I may, is the national recovery plan because you were involved in drafting that document, is that correct?

Professor Alan Ahearne

There was a team who drafted it and I was part of that team, yes.

Something else I wanted to ask you about was ... because, again, in that chapter you submitted ... or in that book you submitted a chapter for, you talk about this visit from Olli Rehn in November 2010 and that the Minister had a bespoke plan for Ireland at the beginning of November and he wanted to discuss that plan with the French Finance Minister and with the German Finance Minister but a call from Olli Rehn in the Commission prior to this meeting of Ministers confirmed that the bespoke plan was not going to work. So, was this the national recovery plan, this bespoke plan, or was it a separate thing?

Professor Alan Ahearne

No. So what he wanted ... I mean, Ireland was under pressure in sovereign ... in the markets. The national recovery plan would have been part of it, so what he wanted to do was get the national recovery plan out, publish it. He wanted the ECB to say that ... because the banks were separately under stress on their funding, he wanted the ECB to say publicly that they stood behind the Irish banks and provide liquidity. By the way, the ECB were never asked to give capital to the Irish banks. It's not that they were asked to pay for a single cent, they were being asked to give funding but they were repaid all the funding. But he wanted them to say that they would stand behind him. And then he was willing to enter some sort of precautionary programme and what he had in mind is they could ... I mean, he said they could do quarterly surveillance if they wanted but the Irish State had enough ... the sovereign had enough money to keep going to the middle of 2011. So he said "Look, let's use that money. If the markets haven't improved, we can run down that money. We've just given ourselves time, given everybody time [the Irish State] given the Europeans time." Because they were in turmoil over what was going on - this was, remember, the start of the EU area crisis - maybe get some money to keep the State going until the end of 2011 and at that stage if Ireland still did not have access to the markets, they had pulled out at this stage, then we'd go for a full-blown programme, but he wanted some time.

Right. And the national recovery plan was a part of that bespoke plan and he wanted to talk to the French and German Finance Ministers about it but Olli Rehn intervened. Was he asked to intervene or on what authority was he working?

Professor Alan Ahearne

No, Olli Rehn had been in Dublin on ... early that week - so on maybe the 8th or the 9th - and he discussed this with Olli Rehn. He met him first privately then he came into the room with several officials and I was there. And Olli Rehn said "This is certainly worth pursuing". That was the point I was making, this precautionary plan. Later that week ... you know, so it looked at this stage there was going to be some time to develop this, to get the national recovery plan out and talk to the various ... to the two Finance Ministers. Later that week - the phone call that I am talking about is from Seoul - there was a G20 meeting. Now, I was in the United States ... I flew to the United States, to New York, later that week so I was in the US but I called back, I think, on the Friday. There was a ... Reuters or one of the news agencies had a story that said Ireland applying for the ... is going to apply for a programme. So I called back and said "What's this all about?" and I was told at that stage that a call had come in, I think, the night before, sorry, or at some stage around then, from Olli Rehn to Brian Lenihan and he had said - in the conversation as it was related to me - "Hi Brian. It's midnight in Seoul. Things have changed." And what he meant was ... "Things have changed.", is that on the Monday or Tuesday, there was this potential to explore a precautionary programme but by the time we got to later that week there was no time to do that.

Because of what had happened in Seoul, because of the-----

Professor Alan Ahearne

Yes.

Was Olli Rehn sent off as an emissary on behalf of the Government? Was he asked or tasked with, you know, sussing this out on behalf of the State or was he just picking up, you know, what was the view at Seoul and that's why he communicated that back?

Professor Alan Ahearne

I mean, he would have been asked to accept the national recovery plan - which eventually they did - and the fiscal projections and all and then so he would have agreed to that but ... that was fine. What he was relaying back is obviously there had been some sort of meeting in Seoul where they had decided that this couldn't wait, that Ireland needed to go into a programme right away.

Just to clarify, sorry.

A supplementary on it and then I'll move on.

So Olli Rehn had a discussion with partners in Seoul on the bespoke plan that Brian Lenihan had come up with and communicated to him in Dublin and they made a decision on it, or not.

Professor Alan Ahearne

I mean, I don't know what happened in Seoul. No, I'm not necessarily saying that. He may not have brought that to ... he may not have brought that. Brian Lenihan didn't send him out to discuss this. Brian Lenihan himself was going to discuss it with the German and French Finance Ministers.

I'll bring you back in again to wrap up, Deputy Murphy. If I can just deal with a few matters myself with you, Mr. Ahearne. In your statement, you say that the merger of Anglo and INBS and the transfer of deposits was a reasonable approach agreed with the troika. Then you, kind of, go on to say, "Ironically, I had identified as an option the transfer of deposits from Anglo to AIB in a newspaper article I wrote in January 2009." Maybe if I could just tease out some aspects of that with you please, Mr. Ahearne, in that do you think the troika was a material motivating factor in the merger of Anglo and INBS and the resultant deposit transfers?

Professor Alan Ahearne

It was something that they wanted to do. I mentioned that it made sense in ... I mean, there weren't huge benefits to it. In fact, the benefits were probably quite small, but they wanted to do it. One benefit was that it did put the two banks that were being wound down together and, in a way, created a separation between them and the other banks. I thought that was probably helpful. And there was a transfer of deposits then from Anglo to AIB. The country needed the deposits, it needed the funding, but the funding really needed to be in the banks, the core banks that were going to continue, not in banks that were going to be wound down. So that made sense to me.

And maybe if you can outline what you would've seen as the potential benefits of your suggested option in 2009 of transferring the Anglo deposits to AIB?

Professor Alan Ahearne

It was just that .... even then, in 2009, writing that, I obviously ... I didn't see a future for Anglo and, therefore, Anglo was ... my thinking on it was it was just going to eventually disappear. You had to do something with the bank's assets and liabilities. I think I wrote in that article about moving the assets to an asset management company. Well, that was done through NAMA, and then you've got to move its liabilities somewhere. So it made sense to move it to another bank.

Okay. Could I maybe invite you also to comment upon the suggestion by the Governor of the Central Bank, Patrick Honohan, that the merger of the EBS and AIB and INBS and Anglo was largely "cosmetic", would have been the words he would've used. In your opinion, was there any real value to be obtained from these mergers?

Professor Alan Ahearne

On the EBS, I mean, it probably would have though it was a very small institution and depositors may well have become very worried about it post the programme. Is this institution going to last at all? And so that would've created worries for depositors which were unnecessary. So folding it into AIB and, therefore, depositors had AIB behind it, at least did provide some assurances to depositors. I don't think there were any big costs to it but ... and no huge benefits, but I think there was a benefit for stability or deposit stability reasons, having a bigger bank like AIB behind those deposits.

Maybe if I can just move on to Anglo specifically in terms of its long-term future in that regard? You recall in your statement that the Minister decided in autumn 2010 to wind down Anglo. Maybe if I could ask you what advice, if any, did you give the Minister to support the decision to wind down Anglo?

Professor Alan Ahearne

I mean, I discussed it with him many times. So he would've known my opinion about it. But, as I said, he was ... he would take advice from lots of different people and he was open-minded on it. So he was giving the management an opportunity to make their case that you could get a good bank out of it and that would be positive for the Irish economy.

So that was one operational consideration that you, kind of, had this good bank-bad bank sort of thing. What other operational factors were considered at the time?

Professor Alan Ahearne

I mean, the ... that was really ... the main one was what do you ... how do you wind this bank down gradually. In what model? There wasn't any consideration ... I mean, it was never a viable option to wind it up immediately.

Professor Alan Ahearne

The bank had huge amounts of deposits, had borrowed a lot of money from the Eurosystem. I think it had about €70 billion of funding. The Irish State could not replace that funding.

So what would have been the consequences to the State in two regards? One, winding it down quickly - as you just kind of said, there were some concerns there, maybe you could tell us more? And what were the concerns in terms of actually keeping it going as a going concern?

Professor Alan Ahearne

I mean, in terms of immediately winding it down, there would've been no gain in terms of ... because it was under the guarantee, the creditors were all guaranteed, so it was no benefit to ... no reduction in the costs to the State. It still had to put the capital in. It was important that Anglo had a banking licence and was able to get funds from the ECB, because those were otherwise funds that the Irish State would have to do to wind ... to gradually wind this bank down.

Professor Alan Ahearne

So an immediate wind-up just wasn't ... in addition, if you wind it up ... I mean, lots of the bank's bonds had clauses in them that everything had to be repaid instantly.

And was-----

Professor Alan Ahearne

The State didn't have that sort of capital.

At any time was it discussed that, look, we're ... the situation with Anglo is this is where it was, this is where it is now and this is where it needs to go and that, ultimately, where it needs to go is a wind-down, a liquidation or some removal of it from the financial landscape?

Professor Alan Ahearne

That was always ... that was always, I wouldn't say the preferred option, but it was always under very serious consideration that eventually this just wouldn't be here, it'd be wound down. It was all about timing. The management came up with this idea, well maybe we can save you a few bob and we can create a bit of value. So the Minister said, "Okay, well, look, just put together that proposal". But, as I said, he was open-minded on it.

And in that regard, it's the final question specifically on Anglo. In the way that the promissory note was structured, did it enable or help or assist or hinder the ultimate liquidation of the company?

Professor Alan Ahearne

I don't think it affected the liquidation. It ... what it did do was allowed that institution to be wound down gradually, which it had to be-----

But inevitably-----

Professor Alan Ahearne

-----and funded at a very cheap ... in a very cheap way as it was being done.

But inevitably if you're going to liquidate something, and we'd know from earlier testimony you ... that there's very particular structures for liquidation and, in this regard, there would be emergency legislation that'd been prepared over a period of time.

Professor Alan Ahearne

Yes.

So you would hit that junction point. So the question I'm asking you specifically is the way the promissory note was structured, was it assisting or hindering to that process?

Professor Alan Ahearne

It was neutral on it ... once the decision was made to liquidate it, the Central Bank claimed the promissory note. So that was just normal Central Bank operations. The Central Bank could've held the promissory note. They decided with the Government that it was everybody's advantage to convert the promissory note into a regular Government bond, but it could've held the promissory note.

Okay. I just want to wrap up with a couple of matters there and to say you were in a similar kind of area with Deputy Murphy a few moments ago. I'll maybe just put the question to you. I know you came in in 2009. You came in after the banking guarantee had actually been put in place but you were dealing with the legacy issue of it in your capacity as an adviser. So maybe if I could start by putting the question to you, did the structure and design of the banking guarantee along with its period of duration - which was two years, the way that it was actually set up - have any bearing on the Irish State entering a bailout programme two years and two months later, after it had been put in place?

Professor Alan Ahearne

Well, it certainly limited options while it was in place for two years. I mentioned ... because all creditors were guaranteed. Of course, it's not at all clear that if there had been a different guarantee or low guarantee that the Irish State would have put banks into liquidation anyway and put losses onto senior creditors, depositors and bondholders. So the answer to that question, just to have it clear, I think, one has to have a clear idea of what the counterfactual is, and it's not clear to me that in the counterfactual-----

Well, the fact is that a guarantee was put in place.

Professor Alan Ahearne

Yes.

So there's no counterfactual of there being no guarantee.

Professor Alan Ahearne

Okay.

There's a guarantee in place.

Professor Alan Ahearne

Okay.

So is it inevitable or not inevitable that you're entering a bailout programme by the particular design and structure of which the guarantee was put in place?

Professor Alan Ahearne

It's not at all inevitable.

What ... what was it-----

Professor Alan Ahearne

Let me give you an example.

Professor Alan Ahearne

Let's say the ECB announced ... we know that it announced in July ... summer of 2012 ... a new programme, outright monetary transactions, OMT. We know it subsequently did a quantitative easing. By announcing the OMT, it reduced the yields on Italian and Spanish bonds, which had gone up to 7%, up to where Irish bonds had been in the autumn. It reduced them ... it kept those two countries in the markets. In other words, it prevented them going into a programme. Now, the programme ... there wouldn't have been a programme because there wasn't enough money for them, but the point I'm trying to make is, if the ECB - and this is a thought experiment - if the ECB had announced in the summer of 2010 OMT, would the Irish State have required a programme. And the answer is, in my view, clearly "No".

All right. But what we do know is ... you're advising us that the ECB didn't capitalise the banks, that the funding, in effect, was a form of quasi funding capital. But is it the case that, in reality, without that funding, the banks were dead, illiquid and insolvent?

Professor Alan Ahearne

Without the funding, the banks would not have been able to meet their obligations and there would have been a call on the guarantee.

So in that regard, were the banks that were covered by the guarantee still solvent and therefore qualifying for ECB-ELA funding at the time of Minister Lenihan’s last letter to Mr. Trichet?

Professor Alan Ahearne

I think the ... I mean, solvency is a technical issue and there are many different interpretations. They were always solvent-----

The ECB have a very specific interpretation and that was laid out in Mr. Trichet’s correspondence repetitively back to Mr. Lenihan.

Professor Alan Ahearne

They were solvent in the sense that the Irish State stood behind them and was providing capital. I mean, if the Irish State is putting capital into them, then, by definition, they have enough capital.

But there were then questions, and your theory, if I understand it right, is that because the State is standing behind the banks, which it was in 2008, and the State is solvent, the banks are de facto solvent.

Professor Alan Ahearne

Yes.

By November 2009 - or, sorry, November 2010 - there is a serious question with regard to the State’s solvency, so there is a serious question de facto with regard to the banks’ solvency. So in terms of the position of where the ECB are coming at that time, are there now concerns that are genuinely placed inside in the ECB with regard to the structure of ELA funding, with regard to the solvency of Irish banks, through the de facto questions of solvency with the Irish State?

Professor Alan Ahearne

I mean, it would be up to the ECB, if they wanted to, to declare Ireland insolvent. They never did.

Were they not implying that in the correspondence? You were saying there was a lot of implication that was stated in Mr. Trichet’s letter, but that was really what the real implication of those discussions was.

Professor Alan Ahearne

I don’t ... There was never a decision in the governing council to say that a particular state was insolvent, so ... I mean, the Irish State was not insolvent at that stage.

Okay. Mr. Cardiff, when he was before this inquiry here, in his witness statement, commented upon Jean-Claude Trichet’s letter in response to one of 19 November 2010 to the late Minister for Finance, and he says: "In many ways this letter was entirely superfluous, since it was already clear by the time of the letter that the Government was going to opt into a [bailout] programme." Would you concur with the statement that Mr. Cardiff said?

Professor Alan Ahearne

Yes. On the 19th? Yes.

Okay. So was Ireland bounced into a bailout programme or was it inevitable?

Professor Alan Ahearne

I mean, I think the timing of it was determined by ... largely by the ECB. They pushed Ireland into a programme quickly.

Was it inevitable? According ... by Mr. Cardiff’s testimony, he is saying - I repeat - “In many ways the letter was entirely superfluous, since it was already clear by the time of the letter that the Government was going to opt into a programme.”

Professor Alan Ahearne

I don't think there was anything the Irish side could have done to reduce our yields in the market and therefore to get back into the market. There were lots of things that could be done in Europe. I have given the example of OMT. Lots of things that eventually did occur, so-----

But they are all programmes by their nature.

Professor Alan Ahearne

-----it wasn’t inevitable in the sense that was there ... there was nobody in the world who could do anything about it. The European authorities could have done something about it but they had set up - as Brian Lenihan explained at the time - they had set up a fund, and their answer was, “Look, we’ve set up this fund to provide financial assistance. You need financial assistance. Go to this fund.”

But if ... just to test the proposition - the proposition being that Ireland was bounced into a programme and if we weren’t bounced into that programme we wouldn’t have required a programme - is that an accurate proposition? Was Ireland ultimately going to go into a bailout programme one way or the other?

Professor Alan Ahearne

If you look at what happened to the yields ... Let’s say the ECB had announced - they didn’t have the programme, but they announced that they would stand behind the Irish banks and that somehow stemmed deposit outflows from the Irish banks. The Irish Government’s plan was to get ... would have then ... wouldn’t have entered a programme. It would have issued the national recovery plan. We would have gone into 2011, but the yields on Irish Government debt were continuing to rise. They didn’t stop rising until we got to the summer of 2011. At that stage the Irish State would have been well out of cash.

Were you aware, or did you witness the engagement the inquiry had with Mr. Trichet in Kilmainham?

Professor Alan Ahearne

I did.

Okay. You are familiar with much of the content of it. When this proposition was being tested against Mr. Trichet - and one of the purposes of engagement with Mr. Trichet was that we would have ... that that engagement would be evidence that could we test with other witnesses, so this afternoon is an opportunity to test it with another witness - Mr. Trichet says: "As you know" - he’s talking about the whole ELA funding - "As you know, we could also have continued on our side after having gone from 100% of GDP to 200% - this is Irish GDP - and why not 300% of GDP? Then what would be the commission of inquiry [referring to this inquiry] be asking for? You would say, 'Were you totally crazy, at the ECB, to continue, when we were going into the wall at 100 miles per hour, to continue providing liquidity and liquidity and liquidity?' " So the question I put to you, Mr. Ahearne: is Mr. Trichet right? If this action hadn’t actually happened and his correspondence of November hadn’t kind of named the situation, and, as we see from Mr. Cardiff’s testimony, that we were going into a bailout programme anyway - if we had just delayed and stayed on the never-never with the ELA, would the bailout have been bigger for Ireland?

Professor Alan Ahearne

Ireland would have run out of cash in ... some time in 2011, so it would have needed financial assistance.

The position, according to Mr. Cardiff, would have been ... according to Mr. Cardiff when he was before ... he said, “The stronger the position you have the better your negotiation situation is.” By running out of cash, does your negotiation position get weaker or stronger?

Professor Alan Ahearne

I mean, there is logic to that, that we probably had a stronger position in 2010 than we would have had in 2011. That said, I mean ... the ECB - they themselves were contributing to the panic we saw in markets. I mean, I gave an example earlier of briefings-----

I just want to stay with the proposition that we have in front of us. If Ireland had delayed its entry into a bailout programme, would the cost have been larger and would our negotiation hand have been weaker?

Professor Alan Ahearne

Possibly, but that’s very speculative. I don’t think it would have made a huge lot of difference.

You don’t think it would have made a difference.

I have another proposition here; it is a proposal for a very short five-minute comfort break. I am going to do that. However, while we are suspending, I just want to advise the witness that he is still under oath. You can refer to any legal advice and support you have here and we will resume in five minutes.

Sitting suspended at 1.26 p.m. and resumed at 1.35 p.m.

We will resume in public session and, in doing so, continue on. And if I can invite Deputy O'Donnell, please. Deputy, you have ten minutes.

Thanks, Chairman. Welcome, Mr. Ahearne. On your appointment to the position of special adviser to the late Brian Lenihan in March '09, were you satisfied that the Minister and his officials were in possession of the management information that was necessary to make informed decisions such as the initial injection of capital of €4 billion into Anglo in May 2009? Was there recognition at that time by the Minister and officials that the data available to them was not as accurate as it could have been? And maybe you could put that in the context that we had PwC in before us this morning and Project Atlas ... one of the assumptions they took was that commercial property would only fall by 4% in value between '08 and 2011, when, in fact, property fell by over 60% during that time period. And, they were ... PwC were subsequently involved in doing work for the Department in around May '09, at which time you would have been in situ, where they agreed with that €4 billion that the new management in Anglo suggested was needed in terms of recapitalisation of Anglo.

Professor Alan Ahearne

I think the Minister fully expected that there was ... the amount of capital needed by Anglo was going to be bigger than €4 billion.

So, when you joined on 18 March '09, what figure did the Minister for Finance believe was needed to be invested in Anglo?

Professor Alan Ahearne

He ... they didn't give me a figure that stage, but not ... a few months later, I would think, I remember him saying that-----

When you say a few months later, precisely?

Professor Alan Ahearne

I can't be precise. Probably, you know, May, June, July, something like that. He thought that Anglo ... I think he said between €5 billion and €10 billion upfront.

€5 billion and €10 billion?

Professor Alan Ahearne

Yes, if I remember rightly. But he thought that the other banks ... that intervention in the other banks could make ... they could profit, particularly Bank of Ireland, and that the ultimate bill might come down to something like €5 billion.

For ... net overall?

Professor Alan Ahearne

Net overall.

And, did you feel at the time ... what was the basis for that view held by the Minister at the time?

Professor Alan Ahearne

I don't know. Presumably, it was the, sort of reports, that he was getting.

And you, obviously, would have come in and reviewed reports and Project Atlas and so forth. And were you ... what was your view on the reports that had been provided to the Minister to that point?

Professor Alan Ahearne

I did say to him, when he said that, "I think it's going to cost a lot more than that". But, ultimately-----

What did you think the banks would be-----

Professor Alan Ahearne

I didn't have a number. Ultimately, it would depend on ... the amount of recapitalisation that was going to have to be done by the State depended on lots of different things. It depended on, one, on how much private capital the banks could attract. There was always, right from day one, I think, some confidence that the Bank of Ireland would be able to attract private capital, and therefore, save the State having to inject the money. There was more scepticism about whether AIB would by then, so it was seen as a more troubled bank than Bank of Ireland.

Did you believe-----

Professor Alan Ahearne

But ... So that was one of the factors, how much private capital. The other was how much capital ratios the Central Bank would set and, ultimately, the decision about how much capital the banks needed was a decision for the Financial Regulator and the Central Bank. I remember being in a meeting at some stage where there was a bit of a discussion - the Central Bank and the Governor and the Financial Regulator were there - a bit of a discussion about what's a good capital ratio for banking and the regulator abruptly stopped it and he said, "Excuse me, there's only one person who can set capital ratios, and that's me", which he was correct. It was not a political decision or a decision for a Minister or a Department.

When was this, Mr. Ahearne, roughly?

Professor Alan Ahearne

Probably 2009.

Professor Alan Ahearne

Maybe the autumn of 2009.

Professor Alan Ahearne

So, the point was that, yes, there was going to be more capital put into the banks. How much? That was a question for the Central Bank. It was going to do its stress test and its PCARs, and it was going to report the number ... up to the Minister to decide whether he puts the money in or not, the overall strategy, but the quantum of money that was required of capital to meet capital requirements, all that was to be determined by the Central Bank.

And did you believe, when you took up your position in special adviser to Minister Lenihan in March 2009, that the information at his disposal, the PwC reports, information from the Financial Regulator, NTMA, everyone else, all other various advisers, did you believe he had sufficient and accurate information?

Professor Alan Ahearne

I realise that, I mean, the, sort of, accurate information you're talking about takes time to gather. The NAMA process, for example, was going to gather very accurate information - time-consuming, but they were going to drill down and, on a loan-by-loan basis get the, sort of, information that, ultimately, you needed. So, the Government ... I think at that stage it was very difficult for them to have a complete picture. How could they have? You're dealing with aggregates. This is what the, sort of, reports were dealing with. If you really want to get into the, sort of, assessment that NAMA did, and that, let's say, eventually, the ECB did in its comprehensive assessment and stress test, then you have to go into incredible detail, one-by-one, and that just takes a lot of time.

Well, were you surprised that, six months after the guarantee when you joined with Minister Lenihan, that the Department of Finance or the Minister hadn't a full handle on the state of the balance sheets of the banks?

Professor Alan Ahearne

I don't say I was surprised. I had ... in the previous time I was in front of the committee, I had said that I had met the Minister in, maybe, August of 2008 and had suggested to him that he should try and get as full a picture ... as good a picture as he could possibly get in the thinking about policy for banks but, again, you know, this is a ... to do the, sort of, exercise that NAMA did, for example, just takes a lot of time.

Can I just ... one quick question. Do you believe that if Anglo Irish Bank had been nationalised or had been ... ELA funding had been put in place on the night of the guarantee and you had gone to the ECB and gone to the European Commission, that you would have been able to burn bondholders and save the Irish taxpayer money?

Professor Alan Ahearne

There's nothing that happened subsequently that would suggest that that would have been a possibility. The ECB was stridently against the burning of bondholders in ... once the guarantee had expired. The whole approach, from what I can see, and I wasn't there in September '08, ... but from what I can see, the whole approach from the ECB, and from Europe in general, was no more Lehman Brothers, no defaults so-----

Well, do you believe that Anglo Irish Bank was solvent on the night of the guarantee?

Professor Alan Ahearne

Again, this goes to an issue of ... in a set of ... to do with solvency, is there a set of accounts that shows positive capital ... the capital ratio, and I think there is.

In your professional judgment,-----

Professor Alan Ahearne

I think there is.

In your professional judgment as an economist, was Anglo Irish Bank solvent on the night of the guarantee?

Professor Alan Ahearne

If you think ... so ... but if the solvency includes, sort of, forward looking, so what losses? It's not the losses as actually recognised today under what I think are imperfect accountancy rules but - you could step back from that, which is in a regulatory or an accounting approach to solvency, and say that, as an economist, this is what is going to happen in the property market and here's the real story with these loans, that there's really not much collateral and stuff like that. If you knew ... if you add on what subsequently happened and the losses, then it was ... it is clearly completely burst on the night, but that is not what the data would have shown on that night.

Okay. Can I take you to the bailout? You've stated earlier to the Chairman that it's your view that if the current bond buying programme that's in place under Mario Draghi and the ECB was in place, Ireland would not have ended up in a bailout programme. Is that correct?

Professor Alan Ahearne

Again, it's somewhat speculative but, I think, if they had introduced OMT earlier, that would have calmed sovereign bond markets and Irish spreads would have fallen ... Irish yields would have fallen in the same way that German and in the same way that the Spanish and Italians' did in 2012.

And how would we ... if we hadn't gone into the bailout programme, how would we have ended up funding the investments that were required in the banks subsequently?

Professor Alan Ahearne

We would have borrowed it from markets.

And do you believe the markets would have tolerated that?

Professor Alan Ahearne

Well, that's just the point. This is ... if you have a backstop, a lender of last resort who is doing what they're doing now under ... it's now under quantitative easing where they're buying and they've driven Irish bond yields to 1.5%. But even under the OMT, which ... actually, there was no bonds bought under OMT - it was just an announcement - but that did reduce the yields. And if your yields are low enough, then when you have access you, obviously, have people who are willing to lend, then you can borrow from them and you can do the plans. I mean, ... if ... and, again, we are talking counterfactuals, which are extremely difficult. In that counterfactual, it wouldn't have made an iota of difference, I think, to the fiscal adjustments that were made. Ireland would still have had to do its fiscal adjustments. The fiscal adjustments that were done weren't done because we entered a programme; they were done because we had a very large budget deficit. Under a scenario where we could borrow from the markets, the borrowing would have been financed by the financial markets as the Government did the fiscal consolidation it did. It turns out that that money came from the official sector, but it's still the budget that had to be narrowed. It didn't make any difference to that. It may well not made a whole lot of difference on the ... what was done in the banking front. So, there was work needed to be done. The issue was who was going to finance it. Ideally, it would be financed by the markets. If the markets aren't going to finance it, then it had to be financed officially.

And who do you believe vetoed at the G7 meeting? Who vetoed the burning of the €4 billion in unsecured bondholders in Anglo?

Professor Alan Ahearne

I don't think it was a meeting; it was a conference call. I wasn't involved in it. I had very ... I have no information about it so I don't know.

And, I suppose, the very final point. Do you think anything different could have been done in terms of dealing with the banking crisis and the guarantee that would have saved the Irish taxpayer the at least €64 billion gross that has gone into the bank and, more particularly, the €30 billion of funds that are gone into Anglo Irish Bank that they will never see a red cent of again?

Professor Alan Ahearne

Stuff could have been done while the bank ... while the property market bubble was inflating, yes, so if you're talking about ... if you're ... but once we got to where we were in, let's say, 2008, I think there wasn't a whole lot could be done on the Irish side. There was a lot of work to be done in restructuring the banks and fixing the public finances, but if you're talking about, sort of, avoiding the pain of the bursting of the bubble, then not a whole that could be done on the Irish side.

If we had the, sort of, European mechanisms - the banking union, quantitative easing - and if they had been in place in 2008, that would have made, I think, the deleveraging and the deflating of the Irish economy, and the recovery, easier, but that's not an issue for the ... I mean, that would ... that's not something that the Irish authorities had control of.

Okay, thank you. Deputy Pearse Doherty.

Go raibh maith agat agus fáilte ar ais chuig on choiste. Can I ask you, Mr. Ahearne ... or Dr. Ahearne, you mention in your statement, "Asset management companies like NAMA have been used in many countries ... to facilitate bank restructuring and to manage and dispose of troubled assets." Can you comment on the different structures and mechanism used in other countries and, in particular, outline their respective success in addressing their own particular issues as briefly as you can?

Professor Alan Ahearne

I mean, there are many different types of asset management companies. They're publicly-owned. Some of them are privately owned. Sometimes there's an asset management company per bank; I think, the Swedes did it that way. Sometimes its an overall stay-alone asset management company, like NAMA or, I think, the Spanish have a very similar asset management company. So there's different variants of it.

Did anyone copy NAMA?

Professor Alan Ahearne

The Spanish copied it almost exactly. I mean, if you look at the legislation, it is hard to - one's in Spanish and one's ... but if you had a translation, it would be very difficult to tell the difference. Slovenia, I think, have copied it.

And successful outcomes or unsuccessful outcomes in those areas?

Professor Alan Ahearne

Well, the Spanish economy is improving. I mean, I'm not an expert on the Spanish economy. My understanding is that that economy is ... this second, is growing at a decent clip now, not as fast as Ireland. But it does appear to be a recovering-----

But in terms of the-----

Professor Alan Ahearne

So I would need somebody else to make an assessment about whether ... they were a bit later to it than Ireland was - we were out ahead of them - but they eventually did set up a NAMA, a Spanish NAMA, and as I said, the Spanish economy does look to be in recovery.

But in terms of ... obviously, NAMA wasn't set up for the purpose of the economy. Obviously, it would have an effect on the economy. It was set up in terms of the banks ... in terms of getting the bad assets off the banks so do you have an analysis of how successful the NAMA ... the copying of NAMA in Slovenia and Spain ... how it worked out in relation to its stated purposes as opposed to the wider economy?

Professor Alan Ahearne

I mean, ultimately, you're trying to fix a banking system for economic reasons. This is all about the welfare of the citizens so you're not stabilising your banking system or setting up an asset management company for the benefit of developers or borrowers or bankers. That was a ... NAMA ... the Government was accused of that when it was being set up. It was false then and it's clearly false. There aren't many developers going around saying that they benefitted greatly from NAMA-----

No, that's not the point.

Professor Alan Ahearne

-----and there's very few bankers going around-----

That's not the point, Mr. Ahearne. The point is in relation to the establishment of NAMA to bring bad assets off the loan books of the banks. For example, it didn't really help Anglo Irish Bank or Irish Nationwide. Those two banks went bust. What I'm saying is you make the point that NAMA was replicated in two other European member states. With the stated purpose that it was set up for, was it successful or not?

Professor Alan Ahearne

Yes.

The economy could have recovered in those countries or could begin to recover for other reasons, but the banks could have still been left as some of our banks were that were not able to be ... that didn't recover.

Professor Alan Ahearne

As I say, I'm not an expert in the Spanish or Slovenian economy. I know in the Irish case that NAMA did achieve its objectives. It deleveraged and de-risked the banking system, and that was crucial. You can imagine-----

Okay. We heard-----

Professor Alan Ahearne

Sorry, Deputy. You can imagine newspaper reports coming out about depositors, let's say, with AIB ... every day news coming out of the property market continuing to fall in 2009 and '10.

If AIB had held onto those assets, people would say, "Is this additional decline or is bankruptcy of this borrower, does that mean that this bank is now bust and I have to withdraw my ... and I should withdraw my deposits?" One of the advantages was, you took the high-risk loans and you put them into an institution that did not need to raise deposits, and that cleaned up ... helped to clean up the bank's balance sheets.

Okay. We heard in testimony from various witnesses on the issues of NAMA and their belief that NAMA crystallised losses at the wrong point in the property cycle. For example, we also heard from Mr. Fingleton last week and he gave examples of three loans that he would be familiar with which were haircutted by NAMA which he believe will ... has already accrued close to half a billion euro of profit to NAMA. We also heard from developer Michael O'Flynn, where he gave evidence to this committee on 23 July and he said:

By paying low prices for assets and by taking good loans as well as bad, it was always likely that [an] entity would generate a profit. However, this profit has been achieved at the cost of an earlier recovery in the banking system and serious damage to some developers, who had loans acquired and who had lost an opportunity to work out those loans. It also ignore[d] the huge hidden cost of fees which [were] not included on NAMA’s balance sheets but, instead, added to the account of the borrower.

Firstly, what's your assessment of the assertion by Mr. Fingleton that NAMA was a factor in the losses experienced by those banks ... by his bank?

Professor Alan Ahearne

The losses were there because the loans went bad and so if somebody lent €100 million to a borrower to buy a field to build houses in the middle of nowhere and it turned out those houses were not built and that field is now worth €10,000 because there's cattle and sheep on it, then there's a massive loss but that loss isn't ... NAMA didn't create that loss, the transfer didn't create that loss, the money-----

But does the-----

Professor Alan Ahearne

-----was incorrectly lent.

But does the transfer ... the example that was given, which we haven't seen as a committee, but the example that was given in terms of the haircuts that were provided on three particular loan cases, NAMA actually generated a profit of close to half a billion euro on them. So, therefore, it was because of the crystallisation, in Mr. Fingleton's view, of the losses at that time on the books of Irish Nationwide that resulted in half a billion euro of additional capital being required for that bank through the taxpayers.

Professor Alan Ahearne

I don't have the detail of individual notes either but I can look at the aggregate. It looks like NAMA is going to recover in or about, say ballpark, as the money it paid. That sounds to me ... doesn't sound to me, therefore, that they completely underpaid the banks.

Well, Mr. Ahearne, we've also heard, and I think it was Deputy McGrath who talked about what's been referred to as vulture funds and private equity funds which are flipping loans, and we have much of this in the media which ... where they're making massive profits because not only did NAMA crystallise the losses at a point in time of the property cycle but it also ... it also sold on the properties as a result of the troika programme to redeem its bonds. So, therefore, even ... if it was allowed to, as a bank would, to work those loans over a longer period of time, it would have gained the benefit. So to say that they're only going to make €1 billion, for example, you also have to look at how many billions the private equity funds have made in flipping the properties.

Professor Alan Ahearne

I mean, if somebody wants to make the case that a bank, AIB, that it's clear that the ... if the ... those ... they would have worked out those loans much better. You look at the way they have dealt with the mortgage arrears and if somebody wants to stand up and say, "It's clear that these bankers are actually really good at working out problem loans," then by all means go ahead and make that case.

Professor Alan Ahearne

But I most certainly wouldn't-----

That's not the case that's being put to you, Mr. Ahearne, with all due respect. The case is that NAMA's structure meant that they had to sell on these loans. They had to sell on these assets within a certain period of time and that was being done at a time when the property prices were either at rock bottom or just starting to recover, whereas if the structure of NAMA were allowed to hold on to the loans for a longer period of time, then you would actually receive greater amounts of money and be able to pay back the taxpayer a lot more.

Professor Alan Ahearne

I mean, NAMA, I think was allowed ten years and, in fact, the legislation said it could go on longer if it needed to.

Professor Alan Ahearne

But this goes back to the earlier comment that there is always this tension about hoarding versus trying to sell off the assets and avoiding fire sales. There's always controversies in the war with the RTC as well about people making money buying at the bottom, but that's an operational issue, strategic issue for the asset management company. They sometimes feel that by getting a few assets out there that begins to get some transactions and that gets things going. That's a strategic, a strategic decision.

My time is limited on this here but I would probably ... if we get a chance maybe somebody would pick it up. I don't think it would be fair to lay that on the door of the asset management agency because there was very strong criteria laid down as to the amount of deleveraging that NAMA would have to do as a result of the programme that Mr. Lenihan agreed with the troika. But can I ask you in relation to the book that's been referenced, In Calm and Crisis, and we talked about burning bondholders, on page 111, Mr. Ray MacSharry, who writes in the book along with yourself said:

One morning I got a call at about quarter-past eight and it was Brian. He told me ... he was able to burn the bondholders and he was very happy because the European Central Bank ... Jean-Claude Trichet had told him he could do it.

Did Minister Lenihan tell you that Jean-Claude Trichet had phoned him and told him to go ahead-----

Professor Alan Ahearne

No.

-----and burn the bondholders?

Professor Alan Ahearne

No.

Do you believe that Jean-Claude Trichet phoned him and told him that he could burn the bondholders?

Professor Alan Ahearne

I don't know, Deputy. I don't know. He ... Brian Lenihan never said that to me.

Well, from ... you've had numerous conversations with Brian Lenihan. You've recounted some of them to the committee here today.

Professor Alan Ahearne

Yes.

Is this conversation that Jean-Claude Trichet phoned Brian Lenihan and told him he could burn the bondholders and then rescinded that, said that he ... when he looked at it, because it was, I think, French and Germans that were going to get burnt that he could no longer do it. Would that be something that you believe that Brian Lenihan would keep from you, as his adviser?

Professor Alan Ahearne

He may have. I mean, he ... I worked for him, he didn't work for me. So he didn't have to tell me everything. It's ... I'm ... it's surprising ... I find it somewhat surprising but I don't know. You're asking me-----

Why do you find it surprising?

Professor Alan Ahearne

Just, given the ECB's view, which was made very clear in November, but I think they were so strident ... it was ... it seemed so contrary to their approach, and their approach was no default, that it just seems surprising that there would have been some enthusiasm from the ECB over it. There was no senior bonds burnt in euro area banks.

No, I understand that. I accept that Mr. Trichet-----

Professor Alan Ahearne

And ... so that you ... it would have got you into a-----

Just finally ... just one-----

Professor Alan Ahearne

It would have got you into a territory where I think the ECB didn't want to go.

Okay. One last question is, in relation to the Credit Institutions (Financial Support) Scheme, which the banks that were guaranteed signed up to and gave effect to the guarantee, there is ... one of the paragraphs there allows for the Minister to amend the terms and condition and also to discontinue the guarantee for any financial institution if it weren't keeping with the objectives of the scheme, which is that it is in the public interest. So, therefore, the scheme allowed for the cessation of the guarantee to any individual institution at any time. It's in article 8 of the scheme. Was this ever considered? Because you've made numerous comments about you couldn't burn bondholders until the guarantee extinguished in 2010, but the scheme actually allowed for the Minister to do that at any point. It had to be at six-month intervals that the review would have to take place. Was that ever considered? Did you look at this scheme in relation to that purpose? Was there ever a view offered that we should maybe look at this area in terms of discontinuing it for the likes of Anglo Irish Bank?

Professor Alan Ahearne

Well, I'm not a lawyer but I think ... you're talking about the European Commission, on a six-month basis would-----

Professor Alan Ahearne

-----would approve it.

Professor Alan Ahearne

But the legislation was for two years.

Professor Alan Ahearne

The money that came ... that came flying into the Irish banks after the guarantee was issued came in on the understanding that it would be guaranteed and was there for two years.

But the Minister ... just to clarify there, it's article 8, which says:

The Minister may review and vary the terms and conditions of this Scheme from time to time ... no later than six-month intervals, to ensure that it is achieving [its] purposes [under] the Act ... At such ... review, the Minister shall consider, inter alia, the continued requirement for the provision of financial support under this Scheme with regard to the objectives of this Scheme and section 2(1) of the Act ... The results of [the] review shall be provided to the European Commission.

But it's the Minister had the ability to review whether the likes of Anglo Irish Bank should continue to provide ... to be guaranteed under the scheme.

Professor Alan Ahearne

Well, the advice I heard, and the officials said this from early on, was the Minister should say nothing even publicly about discounting guaranteed bonds, and that was true right up until ... until the day the guarantee finished. I'm not even ... I'm not even talking about in the future. So if you look at statements through the summer of 2010, the Minister didn't say, "Well, we're now considering what we'll do after the guarantee." The legal advice was "Say nothing." That, that in itself, talking about discounting guaranteed bonds or even talking about discounting bonds after they came out of the guarantee while the guarantee was in place, that that may well trigger a call on the guarantee-----

That wasn't the question.

Professor Alan Ahearne

-----and therefore-----

It wasn't the question.

I ... the question is ... and I need to move this on because we have more witnesses coming today-----

Professor Alan Ahearne

Yes.

The question is that the legislation was structured in a particular way. This has been discussed with other witnesses that have been here before us. The legislation had provision for re-examination on a six-month basis. The question is not with regard to bond values. Was that provision - if I understand the question correctly - was that provision ever discussed or looked at in terms of being activated?

Professor Alan Ahearne

Em-----

Because you spoke about all these other options that were out there, so in the context that there might have been other options, was that provision ever looked at?

Professor Alan Ahearne

I would say that I had a discussion with Brian Lenihan, sort of an out-of-the-box discussion, about rescinding the guarantee on Anglo. So we did discuss that for a while. I think at that stage there was several billion of bonds, but those bonds were not going to mature - these are the €4 billion ... were not going to mature until 2011 in any event. It was mostly deposits, and so that rescinding, which would have had all these various negative effects to do with essentially what would have been perceived as a default - as a default on the sovereign promise, but it's still a default - it would have had all those negative effects, and you would have - if you wanted to save money, ultimately you would have ended up discount ... discounting the positives. So we had that discussion and he ... he didn't pursue-----

Senator-----

I need to move on, Deputy. Senator Michael D'Arcy.

Mr. Ahearne, you're welcome.

Professor Alan Ahearne

Thank you.

Can I just slip back into the NAMA mode following Deputy Doherty? The amount of moneys that were transferred across was €74 billion. That was the full amount. The discounted amount was ... moneys paid ... was €32 billion. A discount of €42 billion was the quantum in its ... in actual figures. How much of the €42 billion would the State get back that was discounted?

Professor Alan Ahearne

I think NAMA are projecting at the moment that they'll ... some small surplus, maybe a billion or so. So the answer is ... maybe a billion or so.

A billion of the 42.

Professor Alan Ahearne

Is whatever NAMA is projecting. Ultimately, we don't know it until NAMA has all closed up, but ... of the ... of the 42, the way you've divided it there - of that amount, it'll be determined by how well NAMA do - what surplus they make.

Would it be fair, then, to say, according to the NAMA numbers, that there'll be a loss of €41 billion in the entire figure, on the 74?

Professor Alan Ahearne

The banks would have lost €41 billion on the loans that they made during the bubble, yes ... on those particular loans.

Yeah. So the conversation about NAMA making a €1 billion loss ... can I ask you your view on that? Is it a €1 million - sorry, a €1 billion profit, or is it a €41 billion loss?

Professor Alan Ahearne

The banks have made losses of €40 billion off it - on those particular loans.

Which is the fairest? Is it NAMA making a €1 billion profit or the banks losing €41 billion?

Professor Alan Ahearne

Well, you can say both of them-----

Well, I'm asking you-----

Professor Alan Ahearne

-----because they'll both be true.

I'm asking you which is yours.

Professor Alan Ahearne

I'd say both.

Well, I'm asking you to select one, please.

The witness can ... you can get to choose the question, but the witness gets to choose the answer.

I'll give you another go at it.

Professor Alan Ahearne

They're both true.

Move on, Senator, please.

Professor Alan Ahearne

They're both true, Senator.

The witness was asked.

Okay. Mr. Ahearne, on 7 September 2007, Professor Morgan Kelly stated in an article in The Irish Times that his view was the exposure to the commercial real estate sector posed a grave threat to the banks' solvency. Why do you think, as a professor of economics, he got such a little ... such a small hearing?

Professor Alan Ahearne

I ... I don't ... he ... there weren't many voices. Part of it ... there were a lot more voices on the soft landing - the economy would be okay, the property market will be okay. They probably drowned out any voices that were giving warnings like that. I think I said last time in front of this committee that ... that a huge amount of people were benefiting from the bubble, and therefore I know people didn't want to hear that. It's also ... I mean, the ... presumably politicians, the political system, would ... in hearing something like that would have turned to, say, the Financial Regulator, the Central Bank or officials and got their opinion on it, and I think the consensus opinion was that whatever's happening is manageable.

If I could slip back a little bit before your time, before you started with Mr. Lenihan ... Minister Lenihan. In the book that's been quoted to you in relation to Minister Lenihan, in Governor Honohan's article, Governor Honohan said the Minister told him he was overruled on the night of the guarantee. Did Minister Lenihan ever tell you that ... make that statement to you?

Professor Alan Ahearne

No. I had no discussions with the Minister about what happened on the night of the guarantee.

Professor Alan Ahearne

No.

Okay. We'll fast forward a little bit, then. In previous evidence, it's been stated that the ECB was briefing against the Republic of Ireland prior to the State taking the national bailout. Were you aware of people briefing against the State?

Professor Alan Ahearne

I gave an example earlier from my own experience of engaging with people - market participants-----

Professor Alan Ahearne

-----that they were saying that they were hearing worrying things from ECB ... ECB or officials on ... someone like that. So I was ... I was aware of that. I mean, there were other briefing ... I don't know where it came from. For example, I mentioned earlier that there was a ... newswire report on the Friday, the 12th - I guess - of November 2010 saying that Ireland was going into a bailout. So there issues about where that came from and who briefed there. I don't ... I don't know.

Okay. You say on page 5 of your opening statement, the third bullet point down - this is the market participants who you'd spoken with - and they had made the point to you that investors were expressing concern. Who were the market participants who expressed that concern to you?

Professor Alan Ahearne

They were ... I don't ... I don't remember their names or what institutions they came from. They were people who came from pension funds. They were inter ... people from abroad, who were with some sort of financial institutions, perhaps pension funds or insurance companies. But they were obviously people who were in the market, potentially, for Irish bonds, and the people who bought Irish bonds.

Mr. Ahearne, could you enlighten the committee in relation to your opinion and the Minister's opinion following the intervention by Governor Honohan on the "Morning Ireland" programme announcing that there was a likely bailout about to occur?

Professor Alan Ahearne

In my opinion ... I heard it on the radio. I ... I called, I think, maybe someone in the press - the press office - and I said, "Was that expected or was that planned? What's the story here?". So it was a big surprise to me. I didn't speak to the Minister immediately after that - it would probably be a good bit later that day - and I didn't discuss it with him. He had moved on. My understanding is, from all the people who spoke to him very quickly, is that he was ... he was annoyed about it, but it was ... by the time I spoke to him, it was a fact of life and we had moved on.

Mr. Ahearne, you joined the Minister's staff in March 2009.

Professor Alan Ahearne

Correct.

We had representatives from PwC here this morning and Project Atlas was discussed, and there were three separate versions - Project Atlas 1, 2 and 3. The final version was presented to the Minister in early 2009. I think it was February, shortly before you had started. Around that same period Mr. Peter Bacon was conducting research, and Mr. Peter Bacon was the first person to state that the cost to the State would now be tens of billions. Were you party to any conversation with the Minister in relation to how PwC could say that the banks were solid and solvent, and at practically the same time - a matter of a few weeks later - Mr. Peter Bacon was making his assertions that the cost to the State would now be tens of billions?

Professor Alan Ahearne

No, I didn't. I mean, I discussed with the Minister, Peter Bacon, the NAMA plan ... quite a lot of them. I did discuss it with Peter Bacon himself. I spent a lot less time on the PwC plan. I mean, I would have maybe been given copies of it, or summaries of it, but I'd say that ...

I think by the time I got in there, we ... we had moved on and the name of the game was to try to separate the assets into NAMA.

Could I just-----

Senator, I need to be moving you to wrapping up as well, okay? Thank you.

Yes. I just want to finish this point. PwC were paid millions of euros and they had access to all the banks. Mr. Peter Bacon had no access to the banks' information and you're telling me that you ignored or paid less attention to the PwC report and you followed Mr. Bacon, is that correct?

Professor Alan Ahearne

I would've got probably a summary or maybe I read parts of the PwC report. I can't remember. It was a fast-moving crisis. Things were moving on.

No, I understand.

Professor Alan Ahearne

The economy was continuing to ... to contract. The property market was continuing to contract.

But there were two reports.

Professor Alan Ahearne

We were talking about - if I remember right - with PwC is stress tests, which are ... have ... there may be some information on them but that's ... there's lots of imperfections with that particular approach. It's not the value ... the loan-by-loan or the detailed-----

But, Mr. Ahearne, what I'm saying is that PwC had access to all the banks, all their loan books, all the information-----

Professor Alan Ahearne

Yes.

-----and you set that aside and you went with Mr. Bacon's. Is that what you're saying?

Professor Alan Ahearne

The most ... when I went in, the most immediate ... there was a budget - a supplementary budget - and then the next phase for the banks was the creation of NAMA and the separation of assets. So, that's what I was working on.

Just to bed this down - because I need to deal with one other issue and just to be very, very clear as well just in case people might have a misinterpretation - Ministers and politicians are responsible for making decisions; officials advise and advisers advise as well. So, I ... the issue here is you're not responsible for a decision that is made by a politician. Let's be very, very clear about that. But, in regard to the advice that Senator D'Arcy is referring to, did you fall on one side of the advice over the other; Mr. Bacon's or the PwC position?

Professor Alan Ahearne

I wasn't asked any advice about the PwC. The banks had-----

Okay. All right, okay.

Professor Alan Ahearne

I think they were-----

I need you to wrap up, Senator, quickly please.

Yes. Just ... on 9 April 2009, Mr. Paul Carty, the chairman of the NPRF, wrote to the Minister in relation to the due diligence exercise on AIB, ultimately citing AIB would need additional capital of up to €1.6 billion in 2010-'11 over the already injected €3.5 billion. Do you recall why the Minister proceeded with the injection of €3.5 billion only having been informed that additional capital would be required?

Professor Alan Ahearne

Sorry, what day was this?

Professor Alan Ahearne

I don't. That was very shortly after I went in, so I don't.

You're not overly familiar with that process, no?

Professor Alan Ahearne

No.

And can you explain the eventual injection of €19.8 billion into AIB and how that total was reached?

Professor Alan Ahearne

It would've been reached because the Central Bank determined a certain capital ratio eventually. That was determined with the troika and that's the amount of money they needed to bring their capital up to that given the amount of losses they were experiencing and were expected to experience.

Okay. Thank you. I'm going to wrap up. Deputy McGrath, please.

Thank you very much, Chair. Mr. Ahearne, I'd just like to quote an extract from Ajai Chopra's witness statement which will be put into evidence and to ask you a question and I know you haven't ... you haven't seen it before. He said:

It is understandable that there is a strong sense in Ireland that burden sharing between Irish taxpayers and bank creditors has been unfair. In late 2010, remaining unguaranteed and unsecured senior bondholder exposure was about €16 billion, somewhat above the magnitude of envisaged fiscal adjustment over the next four years. [The] comparison made the issue very visible. [He said] Even if spillover risks dominated, the question remains - why should Irish taxpayers have to bear a disproportionate burden to address wider euro area concerns?

So, do you believe that Irish taxpayers did bear a disproportionate burden to address wider euro area concerns arising from the banking crisis?

Professor Alan Ahearne

I think Ireland should have been allowed to discount senior bank bonds, in particular the Anglo bonds. I think the Europeans have given their reasons why they didn't think that was in the Irish interest or in their interest and I think a big part of the reason was they felt there would be contagion to ... elsewhere in the euro area. So, that does mean that Ireland ends up having a higher cost for systemic ... in order to save ... for systemic reasons. That said, you know, Ireland ... there were various things done that saved Ireland a lot of money. For example, the reductions in the interest rates in the summer of 2011. So, although there was stuff taken away on one hand, there was a break given on the other hand and how all those things ... how they all net off is a difficult ... difficult calculation.

Sure. And, finally, to what extent, Mr. Ahearne, was the failure to get to the bottom of the black hole in the Irish banks over the course of 2010, when there were various statements about the likely overall bill ... is it the case that the markets eventually lost confidence in our ability to get to the bottom of that black hole and lost patience in that? How significant a role did that play in Ireland ending up in the programme?

Professor Alan Ahearne

I wouldn't overstate it. The main reason we ended up in the programme was because of the scale of the losses combined with the huge budget deficit and everything that was going on in Europe with the euro area crisis. So, there was a big combination of factors. It would have been better ... and it was ... if a number could have been produced and we didn't have to revise up the numbers during the course of 2010 as you explained it. There's no doubt about that. So, I think the revisions would have hurt investor confidence some and part of the programme was to bring in BlackRock to do this very detailed analysis. That was ... turned out to be a very good thing to do. It helped in confidence. So, I think it would be better if we could have got to the bottom of it earlier but in terms of would it have ... would that would have meant that we could have retained market access, I very much doubt it.

Okay, thank you. Deputy Murphy.

Thank you, Chair, and thank you, Mr. Ahearne, again. I just want to return to where we left off with the national recovery plan just to finish up a couple of questions on it. Could you just outline the relationship between that plan and the bailout that we entered into - in terms of it being a blueprint for it - when you were made aware that this was actually going to become a blueprint for what would be our bailout and then the parties that became involved or if parties became involved subsequently once you'd begun your work or the different people had begun their work once the bailout became ... came into view, please?

Professor Alan Ahearne

I mean, I think as we went through the autumn and bond yields were rising and market access was becoming more and more difficult, then it was ... it was clear that this national recovery plan initially had been put forward as something to present to the markets to say "Look, you should lend to us because we have a plan here", but it was clear that if we were to enter a programme - and the probability that we would enter a programme was rising - that it could, therefore, serve as a blueprint. I mean, Brian Lenihan had said that he thought it would be ... the Irish public would find it difficult to accept the huge amount of budgetary adjustment that was still to come - and it was obvious that it was still to come - to correct the public finances if it appeared to be imposed from outside and, therefore, he thought it was important that if there were to be more adjustments - and there were going to be - that they would be seen to have been part of a plan made ... written in Dublin. So, that was a big part of the reason that there was a big push to get the national recovery plan done and, therefore ... before the troika plan was announced.

But was that a presentational issue or was this actually our plan and to what extent then was that plan amended when we entered the bailout negotiations?

Professor Alan Ahearne

I don't think there was any amendment. I mean this was ... the national recovery plan was written in Dublin. I ... there was some comments ... when Olli Rehn came in early October ... excuse me, in early November, he must have had some details because he ... there was a little bit of discussion there about the national recovery plan. I mean, he just had some suggestions about if you're going to do a VAT increase, you shouldn't do it right away, you should do it in the future so people can ... will, anticipating the VAT increase, bring forward their expenditures. Just some issues like that. But the plan was written in Dublin and it was more than presentation. It was ... the Irish Government felt - Brian Lenihan felt - that they were doing the right things, they had been doing fiscal consolidation, that they were on the right path and they wanted to go down that path and they knew they had more information about - economically and politically - about the Irish economy than ... than outsiders did.

Can you just finally comment on your role in evaluating the amount of money that was going to be needed as part of the bailout and the different breakdowns and what you were advising versus what was ultimately secured?

Professor Alan Ahearne

I didn't advise on the particular breakdown. I mean, the quantum of money needed was, sort of, mechanically produced. Certainly, for the public finances, it was a case of crunching the numbers and seeing what sort of money would be borrowed and what maturity ... what money was maturing. On the banking part, the number was extremely large. I remember that - €35 billion. It seemed very unlikely that we required €35 billion but the troika had insisted on that. They ... I mean, they wanted large amounts of capital put into the bank. I think the ECB wanted large amounts of capital because the bank would then have cash and they could repay the ECB. Ultimately, the ECB's ... my perspective on it's approach to this in the weeks leading up to the entering the programme was that they wanted their cash back and they wanted restructuring of the Irish banking system in a way that the Irish banks would repay quickly the amount of money that had been borrowed and the ECB would, therefore, reduce their exposure.

Okay, thank you and just finally if I may then, Chair, just in relation to your time in the Department working for Minister Lenihan and the actions that he took over that period, is there anything that's been left out from the public record or you think misinterpreted or misrepresented from your time working with the Minister in terms of the actions that he took and why he took them?

Professor Alan Ahearne

I had mentioned in my statement about the fiscal consolidation. I mean, at the ... when ... I remember in 2009, there was a lot of arguments about ... the Government surely should be putting money into the economy not taking it out. I think that was a misunderstanding of the nature of the deficit. As I mentioned in the statement, it was a structural deficit. I mean ... and I said a few times in the statement if the work that was done over that period had not been done, the Irish economy would not be growing at 5% this year. I think that's ... to me, that's absolutely clear and, therefore, in his work, he set the groundwork for the recovery that would follow.

Thank you very much, Mr. Ahearne. I'm going to bring matters to a conclusion. Mr. Ahearne, this is your second time before the committee and I'd like just to acknowledge that you were here in the Context Phase as well. Given that and standard practice for all the witnesses when we come to a conclusion, is there anything else you'd like to say by closing comments or final remarks or any additional information?

Professor Alan Ahearne

The initial date I'd been given was very awkward for me and I asked for a new date and I just thank you, Mr. Chairman, and the members of the committee for facilitating that. This is a very important committee and I know that you're winding down or winding up this part of the phase. I just want to say that the report that comes out will be extremely important so I very much look forward to reading it.

Okay. I thank you. With that said, once again, to thank you, Mr. Ahearne, for his participation today and in the earlier process in the inquiry as well. With that said, I now wish to formally excuse the witness and propose that we return at 3.10 p.m. is that agreed? Agreed. So the witness is now excused and we're formally suspended until then, thank you.

Sitting suspended at 2.23 p.m. and resumed at 3.30 p.m.

Central Bank of Ireland - Mr. Alan Gray

I now propose that we return back into public session for our third session of today. Is that agreed? Agreed. Okay. As we can now commence our public hearings with Mr. Alan Gray, former board member of Central Bank of Ireland, the Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off?

Our first hearing of this afternoon is with Mr. Alan Gray, former non-executive director, Central Bank of Ireland. Alan Gray has worked as an economist for over 30 years in Ireland, Europe and in Canada. He was a non-executive director of CBFSAI, that is, the Central Bank, from December 2006 to September 2008 and was ... and recently he has been appointed by the Government as director of the IDA. He is a managing partner of Indecon International Economic Consultants. Mr. Gray, you're very welcome before the committee this afternoon.

Mr. Alan Gray

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're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given.

I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations are being taken into account by the committee and will affect the questions asked and the answers which can lawfully be given in today's proceedings. In particular, it'll mean that some information can be dealt with in a summary or aggregate basis only, such that institutions or individuals will not be identifiable.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on your screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. With that said, if I can now ask the clerk to administer the affirmation to Mr. Gray, please.

The following witness was sworn in by the Clerk to the Committee:
Mr. Alan Gray, former Non-Executive Director, Central Bank of Ireland.

So, once again, Mr. Gray, I thank you for your attendance here today and if I can invite you to make your opening remarks to the committee, please.

Mr. Alan Gray

Chairman and members of the inquiry, as an independent economist I believe-----

Can you lean closer to the microphone there, Mr. Gray, if you don't mind?

Mr. Alan Gray

Sorry.

Or maybe just turn it a small bit towards you. Perfect. Good man, thank you.

Mr. Alan Gray

Thank you. Chairman and members of the inquiry, as an independent economist, I believe that major mistakes were made resulting in the economic, fiscal and banking collapse. To help understand what happened and why, I have submitted new evidence which I hope will help the inquiry.

I am head of economic research with an independent Irish economic practice. I joined the board of the Central Bank in 2007 as a non-executive director. I am on the Government's labour market council and I'm a director of the IDA and chairman of London Economics.

My work as a professional economist has given me the opportunity, since the 1980s, to offer impartial advice to consecutive Labour, Fine Gael and Fianna Fáil Governments and to governments internationally. When I provide any informal advice to Irish Governments or serve on State boards, I request that I do not receive fees or expenses, a practice which is not unusual for economists.

My statement and supporting material comprises extensive notes and documentation I prepared at the time. I ask the inquiry to excuse any references to publications that I have written. These are not to give these publications particular significance but to confirm views I've held at key periods. As well as the banking crisis, I have provided evidence on a number of matters of public interest, including the meeting on unemployment with An Taoiseach on the morning of 28 July 2008 - I should say with the then Taoiseach - and the continuation of the discussion over dinner at Druids Glen. These show that I expressed concerns on the economy at the meeting and I suggested actions to prevent an even more rapid decline. I have provided the 11 pages of detail notes I circulated at the discussion and I would be happy for the inquiry to release those notes and all of the approximate 80 pages of evidence I have submitted.

I turn to the causes of the crisis. Before addressing the significant Irish mistakes, I would like to briefly note the design flaws in the single currency and the impact of the bankruptcy of Lehman's. In considering why there was a crisis in Europe, the Nobel Prize winning economist, Professor Krugman, concluded:

The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects [...] that played a major role in causing [...] the Great Depression.

The design flaws in the single currency were particularly significant for Ireland due to our dependence on trade and the declining competitiveness. In a publication I edited prior to Ireland joining the euro, one of my academic collaborators, Professor Jeffrey Sachs, then at Harvard University, concluded that, "This is surely a big risk for a small country that is dependent on export-led growth - perhaps even too big a risk."

One concern I hold is that the required European institutions and policy instruments may not yet be in place, and complacency exists about this inadequacy. The ideologically driven US decision on 15 September 2008 to let Lehman Brothers go bankrupt resulted in an international banking crisis of a scale not seen since the 1930s. The combined impact of the Lehman collapse and design flaws in the single currency had horrendous implications for Europe. The larger lending countries and international agencies tend to downplay these two factors and shift most of the blame onto peripheral countries.

Central Bank directors are understandably reluctant to criticise the international institutions, particularly given their extensive funding support for Ireland. However, I believe the decision of these institutions to prevent Ireland from burning the bondholders and requiring Irish taxpayers to then bear the cost was morally indefensible. This forced a small state to socialise losses and impose the burden on ordinary working people, while private sector gains were protected.

Reference to the design flaws in the euro and the Lehman's collapse is not to deny the scale of the Irish mistakes. An unpredictable and once-in-a-century external crisis was made much worse by a gross over-dependence on the construction sector and by a failure of bankers, policy makers and regulators to adequately respond to the risks. In my view, the key Irish mistakes were mistakes in lending decision by banks, the failure in the regulation of banks, the impact of Irish macroeconomic policy and intervention in the property sector.

The lending decisions made by individual banks provided loans to developers and others which turned into bad debts. I believe this was the fundamental driver of what happened in Irish banks. There was also a failure of bank regulation and deficiencies in stress testing and macro-prudential policy. Detailed stress tests were undertaken but failed to anticipate the scale of the impending crisis or the level of increased capital needed. In the aftermath of the guarantee, I felt the banks were still in denial of the necessary capital requirements. Writing to the Department of Finance and the Central Bank to provide a contrary, external perspective, I said the banks' own assessment has indicated that they may have sufficient capital to meet regulatory requirements after dealing with anticipated bad debts and that PwC reports suggest that, under certain scenarios, this may be the case. My letter states that I do not accept this and concluded that action on capitalisation is needed and as soon as possible.

In addition to deficiencies in the interpretation of stress testing, there was insufficient regulation of banks and inadequate capital requirements, particularly in the period from 2000 to 2007. Accurate information was not obtained on major borrowers dependent on property and I raised this at board meetings. More intensive involvement in the approval of directors of banks would also have been appropriate. At my very first board meeting in 2007, a new policy was outlined to dampen the growth in the property sector. This new measure required the banks to increase to 150% the capital requirement for lending to speculative property. It was suggested that speculative lending could then only happen after 50% of the property value had been pre-sold. Not surprisingly, as an economist I was very supportive of this revised action as I felt it was beginning to respond to the risks. However, I accept this proved far too little and far to late to address the scale of the crisis which emerged.

Regulatory weaknesses did not cause the crisis but they did not do their job and did not prevent the crisis. This weakness was not due to the absence of supervisory powers and these cannot be used as an excuse for the misjudgments about endogenous risks and the failure to discover practices in the banks. Once developments in individual banks became clearer and more information was available to the board, I concluded that radical changes were essential to the system of financial regulation. I wrote to the Central Bank and Financial Regulator and to the Department of Finance, and I quote, "It has been my opinion for some time that radical changes are needed to the system of financial regulation in Ireland" and I went on to say that "I believe a fundamentally changed basis for regulation of financial institutions is required". As you know from the letter I have submitted in evidence, I suggested major changes at the time, including: increases in the minimum requirements for capital; new controls on lending practices; changes in the incentive structures; greater levels of inspection of financial institutions; new requirements for approval processes for directors and senior management; greater levels of public disclosure and transparency; changes in the relationship between external auditors and the Central Bank; and measures to facilitate and protect internal whistleblowers.

Irish macroeconomic and fiscal policy also played a part in the period post-2000 and there was an over dependence on stamp duty and VAT from property and there was too rapid growth in public expenditure. This was based on a belief that economic growth would continue, together with a consensus on the desirability for increased public expenditure. Concerns on macroeconomic policy were a recurring theme for myself and for other economists in Ireland years prior to the crisis. In a publication to honour Dr. T.K. Whitaker's 80 years, I indicated - and I'll quote - "while the lessons of previous policy errors are well known, there are potential dangers ... particularly if public expenditure programmes are planned on an assumption of continued rapid growth."

I emphasised the difficulty of adjusting public expenditure programmes which could result in the emergence of a large deficit and an expansion of public debt if there was an economic downturn.

Interventions in the property sector also fuelled the fire of property prices. In 1997, I argued that policy should, by appropriate planning and zoning decisions, ease the shortage of land for residential housing. Restrictive zoning meant windfall gains to property speculators, increased housing costs and opened up opportunities for corruption. The escalation in property prices was further fuelled by the build-up of tax incentives. My views on this were informed by an investigation of property tax incentives which I and other economists completed for the Department of Finance in 2005. My views at that time indicated that while the incentives were supported by a range of vested interests, including investors, property developers and banks dependent on property, my report concluded:

There is absolutely no case for further government incentives. Continuing to approve new projects would contribute to oversupply and represent a clear waste of scarce public resources.

I strongly recommended the abolition of the vast range of property incentives.

On crisis management, in the period since I joined the board of the Central Bank in 2007, there were detailed plans by the Central Bank to deal with the liquidity position and a domestic standing group was established jointly with the Department of Finance to examine risks and responses. The focus was on liquidity risks and this intensified over time. On 16 September 2008, a note to directors of the Financial Regulator pointed out that term funding was effectively closed. It stated that post-Lehman's, public concern was increasing and the tone of media comment was systemic rather than institution-specific. Investors were cutting lines to Irish banks and requesting breaks in the terms of deposits. In addition to two institutions which were being very closely monitored, one of the other major institutions advised that, "If markets do not improve, they risk breaking liquidity ratios in a matter of weeks." This signalled to me the danger of a full scale run on the Irish banking sector.

While liquidity risks were monitored, there was much less understanding of solvency and this was a major mistake. This may have been due to the belief that solvency and liquidity were separate. The week of the bank guarantee, leading to the guarantee decision, resulted in Irish citizens paying a very high and unjust cost for the banking crisis. The guarantee was not thought up on the night of 29 September but arose from extensive analysis by the Department of Finance, Central Bank and regulator, with the teams of external advisers. I first heard of the guarantee as the main option being considered in an emergency joint Central Bank-IFSRA board meeting which was called on 25 September but this option must have been developed earlier. As is evident from the official board minutes which I have supplied you with, the Governor and the Central Bank and the Department of Finance indicated that a guarantee of the liabilities of the six financial institutions was being considered. There was no suggestion at that time of any option to guarantee some banks but to nationalise others. The Central Bank board was never asked for a view on that revised option. The minutes of the Central Bank board meeting on 25 September show: "The Governor and the Chairman of the Authority briefed the meeting on the ongoing discussions with the banks and the Department of Finance regarding the liquidity position of the Irish banks and policy options to be considered if the position continued to deteriorate". It indicated that the Minister for Finance ... the then Minister for Finance had convened a meeting on Wednesday, 24 September, attended by the Central Bank, the Financial Regulator, the NTMA and the Department of Finance and, I assume, by their advisers.

The Government had also met with the Minister ... the Governor of the Central Bank had also met with the Minister for Finance and the Taoiseach. The outcome of this meetings ... of these meetings was that the Government wanted policy options for the future of the financial sector to be developed and refined, as a matter of urgency, over the weekend for consideration by the Cabinet at the start of the following week. Following a detailed discussion on the liquidity pressure on all the banks in what was referred to as ... unprecedented international credit crunch, it was suggested that if the liquidity situation did not improve, the issue for the authorities would be how to address the whole financial system.

The minutes highlight what was seen as the key policy option. The minutes explicitly noted that a key policy option for the weekend was whether or not the Government should issue a formal guarantee for the liabilities of the six domestically-owned credit institutions. If a decision was to be made in this regard, the Government would require the formal advice of the Central Bank and the Financial Regulator on the necessity of such a measure and its impact. On hearing this proposal, I raised the following questions at the board. Would it be illegal under state aid rules? I suggested I expected it would be challenged. How could one minimise any exposure to the State? Would financial markets and the public view this as a credible guarantee? Had all alternative options been fully exhausted? And was there any hope of ECB-wide action before consideration was given to such a radical decision? I knew the Government ... the Governor of the bank had been very actively exploring ECB action for some time. And how would any guarantee interact with the necessary restructuring action on individual institutions in order to ensure viability? I clearly remember the representative from the Department of Finance and the Governor and some other directors also expressed strong views on that latter issue.

I made suggestions to attempt to protect the taxpayer and reduce the risk to the State if such a policy was subsequently decided - firstly, by ensuring any guarantee was for as short a time period as necessary and I argued against any long-term guarantee. I indicated if the State felt obliged to give a guarantee, we should get out of these obligations as quickly as possible. I suggested that in the event of any guarantee, the banks should be forced to pay in full for this and the payment levels should reflect the value to the banks and the risk to the State. Some of these points which I and the other directors made were reflected in the formal, signed-off, agreed minutes of the meeting, and I quote:

In discussing the option of a Government Guarantee, the meeting noted that the market would have to be convinced of the credibility of the Guarantee. There was also a likelihood of a legal challenge on competition grounds if it was confined to the domestic credit institutions. The meeting agreed that the issue of an explicit Government Guarantee supported by a willingness to supply additional funding, if necessary, warranted detailed consideration. In this context, however, it would be necessary to identify a viable long-term strategy for the industry and [to] pursue this objective vigorously.

I had the distinct impression at the meeting that a guarantee of all banks was the favoured option and probably the only option in serious consideration which was explained to the board. I felt strongly at that stage that all available options should be examined, rather than simply the guarantee option, and I decided that evening to write to the Department of Finance, the regulator and the Governor of the Central Bank. As is evident from my correspondence of 25 September 2008, which I have provided to the committee, I outlined my view on the principles which should be followed: (i) State exposure to be minimised where possible; (ii) the knock-on impact of any decision should be taken into account and the minimisation of contagion; the cost of any assistance to be paid for fully by the sector, even if this means over time; and wider economic implications should be factored in. The best option was, in my view, a European-wide, EC-wide ... ECB-wide action. My opinion was there was a reluctance by the ECB to recognise the scale of the problem or to take necessary responsibility for their role, but I felt pursuing that action was desirable.

On the option of a guarantee of all six financial institutions, as proposed by the Department of Finance and the Central Bank, I was ... felt there was a need to consider different formulations if this was the chosen option. I also raised explicitly my concern over whether it would postpone necessary restructuring of Irish banks. I had concerns over whether a guarantee would be effective in preventing a bank run and what would be the market reaction. This was still a major concern to me in the days and weeks after the guarantee was announced. I also suggested the payment terms could be structured in a way which would neutralise the competitive impacts, i.e. some banks should pay proportionally more. My suggestion implied much higher costs for institutions such as Irish Nationwide and Anglo. I highlighted the need to take action to reduce Exchequer exposure and to restructure the sector. In my written advice on 25 September 2008 to the Governor of the Central Bank and to the Department of Finance, I outlined three other issues which I felt needed to be addressed as well as the immediate issue of liquidity, namely, a response to individual banks with liquidity issues, actions to reduce risk and potential exposure and plans to restructure the sector. The options for action in relation to individual banks which I proposed on 25 September 2008 included management changes, restrictions on loan ... on loans and a restructuring plan, including managing-down of loans.

Over the next few days, it was very clear the crisis was getting much worse and I felt a bank run was now a real possibility. There was a sense of incredible panic in world financial markets and policy makers were in uncharted waters. I had come to the view that Ireland could face the total collapse of the banking system and the ECB was taking the attitude that we were on our own. By the time we had reached 29 September, I knew from the previous board meeting of the Thursday - of the 25th - that the Government ... that the Governor had indicated he'd previously been against the guarantee but then ... by then felt things had changed. The decision of the US Congress to reject the bailout plan ... their bailout plan - which was an extraordinary decision - meant there was now ... while there was up to then a chance that liquidity pressures would ease, things had now fundamentally changed. My view is that given this development, the guarantee was the sensible option, but of the terrible options available. However, I always understood that a response to the liquidity crisis would at best only buy time to address the underlying problems and to deal with the issues in individual banks. As soon as the guarantee was introduced, my focus was on how to minimise the exposure to the taxpayer and I wrote, on 20 October 2008, to the Governor of the Central Bank and to the Department of Finance stressing that "the day we give a time limited guarantee is the day we need to plan for exiting".

In conclusion, I would like to very briefly suggest a number of issues for possible consideration by the committee that may help to avoid another crisis, namely: supply issues in the housing market, unless addressed, could result in the re-emergence of rapidly increasing property prices and rental prices and even greater levels of homelessness; Governments might usefully consider using any unexpected windfall gains in Exchequer return to repay national debt, rather than fund tax reductions or increased expenditures; the Central Bank should base its policy in regulation on an assumption that any regulated institution could fail and, if it is of systematic importance, will be bailed out, and regulation should reflect that; there is ... a renewal in bank governance and personnel should be a requirement; changes in the nature of auditing of banks are required; and banks need to incentivise long-term gains, rather than spurious short-termism. Thank you, Chairman and members of the inquiry.

Thank you very much, Mr. Gray, for your opening statement, and to get questions under way, I'll invite Deputy John Paul Phelan. Deputy, you have 15 minutes.

Thank you, Chairman. Good afternoon, Mr. Gray ... and I’d ask you to be as brief as you can in your answers - I’ve a lot of questions to cover. Firstly, I put it to you that you are arguably, in terms of this inquiry at least, the most important economic adviser to Government who is largely unknown by the general public. And according to the testimony of Mr. Cowen and, indeed, some others, you were the last person outside of Government Buildings on that night to speak with him on the night of the guarantee. Firstly, I just wanted to ask you are you ... were you expecting a call on the evening in question and were you aware of the significance of the advices you were giving ... given?

Mr. Alan Gray

So I wasn’t expecting a call in the sense there was no pre-arrangement to have a call but I wasn’t in any way surprised. I have given independent economic advice to governments for about 30 years and it’s known, I think by most governments, that because of the international nature of my work that I might have perspectives that other people don’t have. That is not to say, Deputy, those views are right but they are often somewhat different from other views and they are always independent and are never influenced by vested interests. And governments, I ... in my experience find it very hard to find independent economists who can give independent advice and are willing to do so.

Okay, I just ... I'm not trying to cut you short but I want to get through this as much as I can.

Mr. Alan Gray

I understand, Deputy, yes.

In your opening statement ... I want to rewind to before the night of the guarantee, in your opening statement in the notes in references section, you remark that you "have not fallen into the foolish and arrogant trap of suggesting that I have never made mistakes". Mr. Gray, I just wanted to ask you do you believe ... and you referenced the meeting yourself, that it was a mistake for you to meet with the former chairman of Anglo Irish Bank and Mr. Drury and Mr. McGann and the former Taoiseach in and around Druids Glen in July of 2008?

Mr. Alan Gray

I certainly believe, from where we are now and what I know now, that it was a mistake and ... but I have been so concerned about the issues of unemployment in the Irish economy-----

Mr. Alan Gray

No, but just Deputy, can you just let me finish this ... that I have never not accepted any invitation by any Government Minister or any Taoiseach when I have been invited to talk on this issue.

That’s ... and I'll turn to the unemployment question a little bit later. First of all, who organised the meeting, in your recollection?

Mr. Alan Gray

The logistic organisation of the meeting was undertaken by Mr. Fintan Drury who, I understand, was a friend of the Taoiseach's but the Taoiseach had asked me in advance of the meeting would I be willing to have a session to give my perspectives and views.

Was Mr. Drury somebody that you would've been familiar with? Did you have regular contact or irregular contact with him?

Mr. Alan Gray

I knew Mr. Drury and I had irregular contact with him. I did not know him prior to the ... the then Taoiseach becoming Taoiseach.

Both Mr. Drury and Mr. McGann last week stated that you were the one responsible for drawing up the agenda for the meeting. Is that correct?

Mr. Alan Gray

So I think there may be some semantics here that are, sort of, important to be clear on. Nobody asked me to prepare an agenda for the meeting. I was invited, on behalf of the Taoiseach, to attend the meeting to outline any views I had on unemployment and on the ... what was happening in the economy - which is something that many governments have done at different periods - and I put in a lot of effort in advance of the meeting, including talking to some international economists about their perspectives and ideas, and I turned up at the meeting with my detailed notes. So-----

Was there a formal agenda?

Mr. Alan Gray

There was not. I did not have an agenda but it was the case, and this may be a version of semantics which might suggest that was an agenda, I turned up at the meeting and I was at ... there was a general discussion about whether people had ideas and I said "Taoiseach, I have detailed ideas in a number or areas and I have copies of my notes and would it be appropriate to share those?" And so it did actually become the agenda for the discussion but it wasn’t a ... I didn’t see it as an agenda, I saw it as an outline of my views on what was happening, the adequacy or inadequacy of the Government’s response to that and what should be done.

I want to put a quotation to you from Mr. Drury’s evidence to the inquiry in response to a question from Senator O’Keeffe concerning whether unemployment was on the agenda or had been discussed. He said, "The rise in unemployment was something that, you know, we would all have been conscious of, nobody needed to raise it." Now, that is a direct contradiction of your witness statement where you refer to the Druids Glen meeting, on page 2 of your statement, as the "dinner on unemployment", and you've referenced that in your comments. I just, again, ask you to square that particular dichotomy, if you can.

Mr. Alan Gray

Sure, Deputy. Well, I don't really see it as my role to try and square any dichotomies with other people's evidence but in terms of-----

You need to clarify it to the best of your ability, Mr. Gray.

Mr. Alan Gray

Thank you, Chairman. But what I can be very certain of is I was invited to talk about unemployment and what was happening in the Irish economy and that is what I talked about and the detailed evidence notes, which were prepared at the time, and which I circulated ... or any reading of that shows that was the subject matter.

Okay, that’s fair enough. So your view is that, contrary to what Mr. Drury said, that unemployment was discussed at this particular-----

Mr. Alan Gray

It certainly was but I don't wish to get into-----

Was banking discussed?

Mr. Alan Gray

It was not discussed at any time.

Banking in general?

Mr. Alan Gray

In general or in specific.

Can I put it to you that it seems extraordinary that a group of people who all had involvement in banking - whether central banking, commercial banking - the Taoiseach, who was on the precipice of a banking crisis ... that you would gather and have a discussion on the economy and no reference would be made? I’m putting that as a layman on the street might feel.

Mr. Alan Gray

Well, I was asked to talk about the unemployment and the economy and to share my views on it. I was not asked to attend a meeting to discuss banking, and if I was asked, Deputy, to attend a meeting with those participants on banking, I would not have attended. I would've felt that was a matter for the executives in the Central Bank.

You state on page 8 of your written statement, and I want to quote you directly, that you raised at board meetings the accuracy of information "from [...] banks [and] elsewhere on the position of major borrowers dependent on property". I want you to outline, if you can - because I haven’t been able to find them - any board meetings where you brought that subject up, the dates where they happened, and if you have maybe some of the ... some of those details that you can present to the inquiry.

Mr. Alan Gray

Of course, because it was something that was of particular concern to me, having previously - in 2005 - undertaken the investigation of what was happening in the property sector and the way the tax incentives were fuelling property prices. I was also very aware, as an economist, of the scale of growth in commercial lending that had occurred over the period from 2000 to 2007 and I don’t have ... I didn’t have time, Deputy, before this attendance to look at every reference but I do have some references that I would like to bring to your attention. At the regulator board meeting in, I think, mid-2007 - and you have, I understand, a copy of the board meetings - I did indicate that I felt it was necessary to examine in more detail the top property exposure in the banks. I suggested that there would be merits in examining the holding company accounts of the banks and ... sorry, the holding company accounts of the property developers or major borrowers, and to review whether information provided by the borrowers to different banks varied.

Were they telling the same story to each of the banks? And what was the credit assessment of those property developers by individual banks and was there any difference? Because it was known to people on the Central Bank and the regulator board that they shared the same clients.

I'd also point out that in December 2007, the banking supervisory division, following on from that point I made, conducted a series of inspection of the banks to look at the commercial property lending. And in January 2008, the IFSRA board were informed of a number of issues that were raised. I'd also like to encourage you to look at the board minutes for the regulator meeting in May 2008 when I again raised this at the IFSRA board and requested more investigation of the risk exposure of the banks to major property developers.

Just finally, and I won't ... I know you've lots of questions and I'm happy to answer them all. In June 2008, I asked of what progress had been made on this and I was informed at the board of the regulator that arrangements were being made to interview the heads of lending in the main banks in order to examine in more detail the principal exposure to property developers. And they were notes I had kept at the time but if I had time to forensically go through all of the-----

That's fair enough.

Mr. Alan Gray

-----IFSRA board meetings, I think you will see the references to those.

Was Anglo one of the banks that you were concerned about?

Mr. Alan Gray

I was concerned on all of the banks.

Okay. Did you, when you were invited to attend the meeting in Druids Glen - this is the last question I'm going to ask about this particular matter-----

Mr. Alan Gray

No problem.

-----not feel it appropriate to maybe raise your concerns ... that you were meeting with people, all, bar the Taoiseach, who were directly related to Anglo Irish Bank, that perhaps those concerns should be raised with the Taoiseach in advance and even potentially with them in their attendance at the meeting?

Mr. Alan Gray

I certainly would not have considered my role, as one of nine non-executive members on the board, to be meeting an individual - representatives from an individual banks - and raising issues. I felt the appropriate channel to do that was at the board meeting and I have given you a number of references where I had done that. And I would also point out that, when invited to that meeting, I knew Fintan Drury was a friend of the Taoiseach and a communications adviser and I saw him in that context. I knew Mr. FitzPatrick was, indeed, chairman of Anglo Irish Bank and that would have been known to everyone. But I saw Mr. McGann as somebody who ran a major manufacturing company rather than an Anglo bank executive director.

Can I ask you, ... now I have only a minute left and I want to cover a couple more areas. At annex 9 of your statement, you state: "No one from Anglo has ever asked me to take action on their behalf or to make representations on their behalf." What then, Mr. Gray, were the former chairman and chief executive of Anglo coming to meet you about on the night of the guarantee?

Mr. Alan Gray

So, I think when they came to me on the day of the guarantee - and I think it was that day - they ... I did not invite them to come, they came. I believed they understood that the bank would not open the next day because that was the information that was available to the Financial Regulator and I think was widely known in the market. And I think they were very keen to try and find any option or any channel to, you know, have their views aired. They came and they ... Mr. Drumm had a presentation with him. I told him I had a very busy day and, you know, was there ... I'd prefer he would just tell me what was the purpose of the meeting. And he went through a number of points in his presentation. He didn't leave it with me. I told him these were issues that they should talk directly to the Central Bank on, and to the Financial Regulator, and that was what happened.

Mr. Alan Gray

And just because I know there has been unfounded slurs in some social media that is suggesting that I agreed to make some representation on their behalf and I can categorically state under oath here that I never did, nor would I and nor did I.

You're under affirmation, I think, instead of oath. I just want to put the quote to you again. You stated-----

Mr. Alan Gray

In both cases, I'm telling the truth.

You stated: "No one from Anglo has ever asked [and this is page 9 of your own, the annex, or annex 9, sorry]-----

Mr. Alan Gray

Yes.

"[N]o one from Anglo has ever asked me to take action on their behalf or to make representations on their behalf." What was the discussion about on the night in question, unless they were asking you to take some action on their behalf or to make a representation?

Mr. Alan Gray

But this was a very short-----

Mr. Alan Gray

This was a very short meeting. I didn't ask for it------

I'm not saying, by the way, that you were-----

Without interruption now, Deputy.

I'm not saying that you made a representation on their behalf-----

Mr. Alan Gray

I understand.

-----but you stated in your own opening statement that you weren't even asked.

Mr. Alan Gray

I wasn't.

But what was the discussion about then?

Mr. Alan Gray

I've told you, Deputy, what happened at that meeting and what was the discussion but if you're asking me a different question of, "Why did they decide to come?", that is an area of speculation which I'm not in a position to answer.

Okay. Finally-----

If I can just deal with it. If one assumes, Mr. Gray, that all behaviour is purposeful and needs driven - I sometimes question that theory but that's what psychologists would believe - what was the purpose of Anglo coming to meet with you and what was the need that they were expressing?

Mr. Alan Gray

So, they were coming and expressing something that was blatantly clear to me and anyone who was on the Central Bank or regulator board - that they were facing a major crisis.

Okay. That's what the presenting issue was. What was the presenting ask?

Mr. Alan Gray

They didn't give me a presenting ask, Chairman.

Okay. Right, thank you. Conclude please, Deputy Phelan.

I just ... My final question then is in relation to the actual phone call which I touched on at the start. The options that were discussed ... I just want you to briefly outline them. Mr. Cowen, in his testimony to the inquiry said - and I want to quote him directly - he said:

I phoned him and asked him what he thought of a guarantee option being used. Mr. Gray emphasised that providing a guarantee would, obviously, give an advantage to those institutions to whom the guarantee would apply vis-à-vis competitors, since they would have the backing of the Irish Government.

In your statement to The Irish Times on 14 January 2011, written on your behalf by a legal firm I understand, provided to the inquiry-----

Mr. Alan Gray

Deputy, it was not written on my behalf by a legal firm.

Okay. Sorry, it's been presented to the inquiry ... I misunderstood it if that's ... I wasn't trying to mislead myself. You state that you were asked to "obtain your views as a director of the Central Bank on the likely market reaction". The question - really, there's two parts - what were the options discussed? And which is, in your recollection, the correct recollection of events of that phone call? Did Mr. Cowen ask you what you thought of the guarantee option being used or did he ask you the much narrower question about what the likely market reaction to that option would be?

Mr. Alan Gray

Okay, Deputy, if I can deal with the two questions. First of all, the option that the Taoiseach asked my view on was the very same option that was raised at the Central Bank board meeting the previous Thursday, which was an option to give a guarantee to the six financial institutions. And he asked me what did I think of it and what would be the market reaction. I don't see a difference in that-----

One is a broader question. The market reaction is a-----

Deputy, I will bring you back in the wrap-up.

The market reaction could be encapsulated in the broader term but I mean, what I'm saying is your initial statement or that statement in The Irish Times specifically said, "likely market reaction". That is a very narrow thing.

Mr. Alan Gray

Well, I think, Deputy, to be, you know ... in terms of fair procedure, the statement went on to explain the issues that I was ... dealt with in that discussion, which, if you took a very narrow interpretation of just market reaction, then it wouldn't have raised issues that I raised, which was that the bank should be forced to pay a fee for it and that it should be time-limited because the longer you give a guarantee, the bigger risk to the State.

And so, I don't see any difference. I wrote that statement, not with any legal assistance or any legal advice. And I had a significant dilemma in writing that statement because I have always operated as a very professional economist, operating with commercial confidentiality. When that issue became a matter of national public debate, I was extremely ill at the time and I wasn't quite sure how to respond. Other people didn't make any statements and I still don't know to this day did I made the right call in trying to balance professional confidentiality and in terms of having public disclosure, but I made that decision.

And it ... I have had discussions with the current Taoiseach and previous Taoiseachs and previous Ministers and I would never dream of making a public statement about them. Even this morning before I came to this inquiry, I was asked advice from very senior people in the Prime Minister's office of another eurozone country. But I don't go issuing public statements about contents of discussions I have, because it is the epitome to independent professional conduct. But I made that decision and I don't know whether it was the right one or not.

I am just going to bring in Senator Barrett. I just need to clarify this so we don't ... we avoid repetition and kind of visiting the same area over and over this afternoon, Mr. Gray. Just clarify this. On the day of the guarantee, two officials from Anglo called to see you, yes?

Mr. Alan Gray

That is correct.

The two officials were?

Mr. Alan Gray

Mr. Drumm and Mr. FitzPatrick.

Okay, so the chief executive officer and the chairperson of Anglo.

Mr. Alan Gray

Exactly.

They called to see you and they tell you about their problems. Yes?

Mr. Alan Gray

Yes.

And they did not ask for any action and they did not ask for any advice. They just called to tell you their problems.

Mr. Alan Gray

They called to say that they were facing a crisis, something that I was well aware of.

I know that ... that they told you their problems.

Mr. Alan Gray

I understand.

I just want ... but at no time ... there was no request for any action and there was no request for any advice.

Mr. Alan Gray

There wasn't.

Okay. So, other than them calling to tell you about their problems, was there any other purpose or content or any related matter that you are not telling us now?

Mr. Alan Gray

There certainly wasn't to my knowledge, Chairman. What were their motivation in doing it would be a matter of speculation.

I am not speculating; I am just dealing with facts.

Mr. Alan Gray

Well, I don't have any other facts.

Okay. Senator Barrett.

Thank you, Chairman, and welcome to Mr. Gray. You're saying that you don't take a fee from the Central Bank and you provide your economic advice free. I mean, how does that work in the sense that ... does your company lose every time you're spending a day or two at the Central Bank? Is that the consequence, yes?

Mr. Alan Gray

It would, Senator, that would be the consequence. And I think, Senator, you, probably more than most, would know that there has been a long tradition, since the 1950s or '60s, in economists being willing to give their time and views on important issues free to governments, where they're just asked for their opinions.

Okay, thanks. Now, on the Central Bank, you joined in January 2007 and the crisis happened in September 2008. So, you had about 20 months. Could you describe your experience? Did you see it building up or did it all happen at the very end in a crisis situation, or could you see it building over that 20-month period?

Mr. Alan Gray

Senator, so I certainly did not know that the particular crisis that we've all had to been faced with would occur and I don't believe anyone else anticipated that scale of crisis, and I have outlined why I think that crisis happened, by a combination of both Irish and international mistakes. But I was very aware of the risks in the banking sector and the risks in the Irish economy and I raised those risks on many occasions. In terms of Deputy Phelan's questions, I outlined some of the risks I raised and looked for action to get more information on the commercial property lending side and I also raised issues in relation to the stress testing of banks and a whole range of other issues, some of which are in the detailed evidence I've supplied.

Were you the only contrarian on the board expressing those kinds of sentiments?

Mr. Alan Gray

It is a very interesting question, Senator, because I have seen some media reports which seem to suggest that there were no other ... well, there were no challenges being made. And that is not aligned with my experience of the board meetings in the period since I joined in 2007.

And what did people challenge the conventional wisdom about?

Mr. Alan Gray

So, I think it was very much a question of looking for the executives to examine in more detail the key risks that were in the banking sector. And they related to examining in terms of what was likely to happen in the commercial, buy-to-let market, in the property sector. It was very much in terms of looking at and encouraging an investigation of what would happen during a property crash, because all booms end in either a slow down of property prices or, in a significant number, in terms of a property crash. So, I think there was a very wide range of risks identified and research done, but they came to the wrong judgment on what actually happened.

Why did they come to the wrong judgment?

Mr. Alan Gray

I think there was a combination of factors. I think undue comfort was taken from the fact that the previous decline in Irish property prices, which happened a number of previous ... a number of years previous, had not caused any difficulties for the banking sector. I think the second reason was they felt from their detailed international research, which they presented in terms of the draft stability reports, that the probability was that if there was a property crash, it would be a property crash that would decline over time rather than the scale of immediate crash that happened following the Lehman Brothers. And also Senator, I think because they believed that the magnitude of that property price decline would be less than actually transpired.

Was this a discussion or did they actually give you data on sectoral concentration, on loan-to-value, on loan-to-deposits, on the amount of borrowing from the Central Bank itself, from the ECB? Did you get numbers to back up your fears?

Mr. Alan Gray

Yes, Senator. They weren't my figures, but in terms of the level of evidence given to the board, I felt that there was a good granularity on those numbers and estimates and, if we've time, I would like to talk a little bit about the stress testing that was undertaken, the research that was done for it and why it actually failed to anticipate the scale of crisis which emerged.

So, an impression that the Central Bank and the regulator weren't aware of what was going to happen in September 2008, you would say that's wrong, that they were, they had the data, they were presenting it at the board and the board members were analysing it.

Mr. Alan Gray

They certainly - and I wouldn't like to give any misunderstanding of this - they had no idea of the scale of the crisis which subsequently emerged, but they did examine a wide ... they certainly knew that the property exposure of individual institutions ... they didn't have sufficient information on what exactly was the position with individual property borrowers, and that was something that I raised at a number of board meetings.

But they did know about the exposures and they did know about the necessity to identify the key risks.

Did the directors discuss ... some, two of the biggest banks were lending about 7% of their book to agriculture and industry combined, and about 80% to property. Did anybody raise fears around the bank, the Central Bank board table, about that kind of a banking system?

Mr. Alan Gray

They did, Senator. I think from the time I joined, really, a few things were happening. First of all, that incredible mountain of build-up of lending to the property sector really was just hitting its peak. And I cannot comment on any analysis that happened prior to 2007 when the real risks were built into the sector, but there was a detailed discussion on the risks which were very evident then, Senator, and that was a part of the board discussions.

Were there concerns about houses moving from two and a half times average income to up to 12 times average income, or The Economist international data on house prices showing that Ireland was way ahead of pretty well anywhere else that The Economist was collecting the data?

Mr. Alan Gray

There was. I think the full awareness of that scale of risk was probably ... the nature of that risk was probably not fully anticipated because there was evidence that the property prices were declining and they had a belief that things would get better.

You mention on page 6 of your presentation your concerns about the design faults in the euro. Did the Central Bank have any fall-back position to deal with massive flows of capital into the Irish banking system?

Mr. Alan Gray

I don't recall any discussion of that issue at the Central Bank.

Did you bring the work of Jeffrey Sachs, your author, to the board to warn them about that?

Mr. Alan Gray

I did not. I felt that the design flaws in the euro were something that would have needed to be addressed previously but I was attempting to focus on what was really the outcome of those risks.

Did the bank have any contact with the ECB about the dangers to our economy from the design faults in the euro?

Mr. Alan Gray

It was certainly the case that we were informed by the Governor that there was intensive interaction with the ECB about the liquidity position in the Irish banks, which was related to that factor. And indeed that was part of the reason for the domestic standing group being established as a tripartite group between the Department of Finance, the regulator and the Central Bank.

Yet in the documents you sent us there seems - I'll put the proposition to you, that there is a remarkable lack of urgency, you know, as this problem built up. You know, measures to have thoughts about further measures, sort of, kind of thing. The imminence of the crisis doesn't seem to have led to any policy response.

Mr. Alan Gray

I think, Senator, by the time it was clear that the crisis was imminent the policy instruments were really very limited.

You were a strong opponent of the tax incentives for property and your study, in fact, quantified some of the measures which hadn't elsewhere been quantified. Could you tell us why you were so strongly against tax-based property investments?

Mr. Alan Gray

I think that they are one of the biggest Irish mistakes that happened within our own control. I think that there were a number of issues in relation to property-based tax incentives. One was that they meant that funding was being directed into, effectively, a unproductive part of the economy rather than supporting the internationally-traded sectors and this was of concern to me, not just as the crisis emerged but much earlier. I think it was in the early to mid-1990s, in a book that I wrote that, Senator, you may be aware of because one of your colleagues, Professor McAleese, was one of the contributors. But in my chapter on that book I pointed out, back then, back in I'm not sure if it was 1992 or 1995, that no new taxation measures should be introduced for any activity in the non-traded sectors of the economy. And I pointed out that views ... viewed in isolation many of the tax incentives for certain property and other investment might appear defendable in order to achieve a specific local or other objective, but viewed against the background of the need to encourage tradeable activities, such activities cannot in general be justified. And I purposely went on to say that there should be no further extension to the timescale for them, and I pointed out that whenever a date is set for the cessation of investment-related property tax incentives, strong vested interest groups will emerge to seek an extension of such deadlines. The case will be argued that investments were in the planning stage and it would be inequitable to have the cut-off date. I said, alternatively it could be argued the level invested had not taken place and the timescale should be extended, but I said-----

Okay, thank you. If I may-----

In general, just a point, I need you to return to me with the line of questioning and what's outstanding maybe in your wrap-up, Senator, but I need you to focus up on concluding your line of questioning there. We've only got a couple of minutes left.

Yes. Your memo to Kevin Cardiff on 25 September 2008 outlining the five options to deal with specific issues faced by the individual domestic banks ... did you get a response to that?

Mr. Alan Gray

I didn't get any formal response. I ... my memory is I got a phone call to thank me for my-----

Mr. Alan Gray

-----letter, but that was it.

And that was an altruistic gesture. Mr. Cardiff didn't ask you for it or commission you to do it.

Mr. Alan Gray

No, this was the only - I gave that as a member of the Central Bank board, who earlier that day was told that the Government were looking for urgent actions to deal with the escalating liquidity crisis and that the Government would be seeking the views of the Central Bank board. I outlined my views at the board meeting but I wanted to make sure that there was full understanding, because in a board of nine people you can only have - a bit like this committee - you know, conversations can get a bit shortened even though it might be worthwhile to continue. And I went home that evening. I dropped everything I was planning to do and I wrote that detailed memo. Nobody had requested it, other than they had pointed out that this was likely to be the option and I felt it was important to encourage consideration of other options.

Finally, you sent in about 4,500 words, estimated, on the employment and unemployment problem. Did you get a response to that from the people who attended that particular meeting?

Mr. Alan Gray

No.

I just want to deal with-----

It happens to economists. I'm very sorry-----

-----the disagreement that Senator Barrett was touching upon. Just to clarify, the advice requested, was the advice requested by the Department of Finance or by Mr. Cardiff?

Mr. Alan Gray

So the advice wasn't requested either by the Department of Finance or Mr. Cardiff. I attended that day a board meeting, which I have given you the minutes of, which said the Government are considering the option of providing a guarantee on the six financial-----

Who informed you of that?

Mr. Alan Gray

It was informed by ... that was the discussion at the formal Central Bank board-----

Mr. Alan Gray

-----meeting where the Secretary General of the Department of Finance, the Governor and the chairman of the regulator were briefing the board - the non-executive members-----

Mr. Alan Gray

-----on developments that had happened the previous day in terms of the-----

Okay, but you then fed in a document afterwards-----

Mr. Alan Gray

Exactly.

Were they expecting it or did you just come and write, and say, "Look, I'm going to bang it into the guys there tomorrow", or what?

Mr. Alan Gray

I didn't see it, Chairman, in terms of banging in something tomorrow. I felt this was going-----

Were they expecting it?

Mr. Alan Gray

They were not expecting it.

Okay, that's fine, so you ... this is something you done under your own volition?

Mr. Alan Gray

I done on my own volition. That's what independent economists do, they give their independent views. I wasn't commissioned to do it and no one was paying me to do it but I felt it was important to outline my views on those issues.

So, in this regard, this is a voluntary action, but, at any time, was there a consultancy agreement between Indecon and the Department of Finance?

Mr. Alan Gray

There was no consultancy agreement between Indecon and the Department of Finance on any issues concerning financial services or anything related to this. As I pointed out, on occasion we would win assignments on a competitive basis like our property-based tax incentive review but this was nothing to do with ... nobody was paying me to do this but as a director of the Central Bank I felt a responsibility to give my views.

Well, I just want to stay with this particular. Was there any reason why liquidation was not considered on the most stressed banks prior to any guarantee being issued to ... for the other viable banks?

Mr. Alan Gray

Chairman, that was not one of the options. I mean the options that were presented at the Central Bank board meeting ... there was only two options given. One was to provide a full guarantee on all the banks and, secondly, to give a bond to all the banks which would have effectively the same thing.

I know on that day you are moving very much to a pinch point where a decision has to be made but at any time in the lead up to that - I am not even talking about this afternoon, that afternoon - was there any reason why liquidation was not considered on the most stressed banks?

Mr. Alan Gray

I think it was a belief and I think probably a correct belief that to let a bank of systemic importance fail in terms of liquidating it would have been a really extraordinary act in the context of a banking crisis.

And this brings me on to the next issue because there is a question there as to whether Anglo is systemic or not and so forth and that it was a point of debate. So was liquidation rather than the nationalisation mentioned in your memo to Kevin Cardiff dated 25 September 2008 not a more favourable option for the Exchequer?

Mr. Alan Gray

It would have been much more favourable for the Exchequer but much more damaging for the economy. I know of no expert economist in this area that thinks in the middle of coming into a bank run that a sensible option would be to liquidate a bank and we do have one example of that, Chairman, namely, in Lehman Brothers and we know the impact of it.

To say I am grateful to allow me the discipline of getting through some of this stuff here with you, Mr. Gray. Just finally on that, was a political guarantee rather than a full blanket guarantee considered as an option by you or the board members and, if not, why not?

Mr. Alan Gray

It wasn't considered by the board members but it certainly was considered by myself. And on the second page of the detailed document that I put in, I put a potential option would be that there would be a Government or ministerial statement indicating a State guarantee would be provided if required or an intention to provide such a guarantee but with no immediate commitment or legislation. And I gave my assessment of that would be that that would be in danger of being seen as too weak and it would probably be better not to have any such statement. And that if in the scale of the crisis we were facing, any systematic wide initiatives must be seen as sufficient otherwise it would fail. And I think the idea that in the scale of the crisis that people were facing that a general political statement from the Government would've prevented a bank run, I think would not be a credible option.

So it needed a full paper guarantee not just a political statement.

Mr. Alan Gray

Exactly.

Just for the moment, we can deal with the specific regulatory matters as I, kind of, go deeper into the question but just for now, I just want to deal with the processory aspects of it. In your witness statement you advise, "I felt so strongly on this that I wrote to the Central Bank Governor-Financial Regulator and to the Department of Finance and suggested radical reform of financial regulation." Now I just don't want to get the details for the moment but would you consider it normal practice for a board director to write to the Central Bank Governor and the Financial Regulator expressing concerns? Would that be normal practice in the main?

Mr. Alan Gray

I think in terms of the strength of my views and in terms of my understanding of the scale of changes needed, it was an appropriate action. It wouldn't be a normal action, Chairman, in a normal situation if there was not major problems and the reason that I sent it to the Department of Finance and to the Central Bank and not just raised it at Financial Regulator board meetings was it would require Government action and legislative changes as well as simply a matter within the remit of the board.

A more holistic solution, I suppose, for want of a better word.

Mr. Alan Gray

Exactly.

Were you aware of any other directors looking or doing otherwise, that would have been, that would have taken kind of similar actions?

Mr. Alan Gray

I am not aware but I would not necessarily be aware. I did not send those letters to all the directors. I didn't go to board meetings and say, "I've taken the time to look at what I think would be the issues in a guarantee", and urge action and things. And maybe others did but I have no knowledge of that.

Can you maybe just advise the committee as to what was the reception, the reply you received, to this written note?

Mr. Alan Gray

So, I think on ... I think I've submitted five letters I have sent into the Secretary General, the second secretary, the chairman of the Financial Regulator and the Governor, concerning either the guarantee, the issue of capitalisation or the regulation and on all occasions I would have had a verbal acknowledgement and a, "Thank you", for them but they would not have discussed with me what responses they were proposing to take and, Chairman, nor would I have necessarily expected them to.

Okay. I am just going to bring in Deputy O'Donnell in a moment but I just want to afford you to give the fullest explanation in this. When Anglo called to see you ... Mr. FitzPatrick and Mr. Drumm, where did they see you, your office, your house?

Mr. Alan Gray

As I indicated in my published statement, to my office.

To your office, okay. Who advised them to go to you? Did they say a person said we need to go and see you?

Mr. Alan Gray

I have no idea.

Okay. How did they find you? Did they have your-----

Mr. Alan Gray

I have no idea. I mean, it is a matter of public record, the research practice that I lead and-----

Were you expecting them?

Mr. Alan Gray

I was not expecting-----

They didn't phone ahead?

Mr. Alan Gray

They didn't.

Okay. And they didn't ring or have your number? They just literally showed up on the door. What time of the day was it?

Mr. Alan Gray

It was in the afternoon but I couldn't remember-----

After lunch?

Mr. Alan Gray

-----the precise time. It was after lunch, yes.

And later that evening you had a discussion with Mr. Cowen -----

Mr. Alan Gray

I did.

-----about ... he stepped out of the room to ring you and he expressed to this committee the importance that he would take and weigh upon your advice. Did the engagement with Anglo that afternoon inform any of the discussion with Mr. Cowen later that evening?

Mr. Alan Gray

It did not.

Okay. Deputy Kieran O'Donnell.

Thanks, Chairman. Welcome, Mr. Gray. Mr. Gray, can I go to Vol. 1, page 65 to 66, its core document, it's the letter of 20 October that you wrote to Mr. Kevin Cardiff? You might just summarise what were the main points you wanted to raise. It is about an exit strategy from the bank guarantee, the reasons why you wrote the letter so early in the guarantee period. How was the letter received? What action was taken on foot of it? You sent a similar letter to the financial stability committee in the Central Bank and what action was taken on foot of this?

Mr. Alan Gray

So, is that in the-----?

It's in Vol. 1, page 65.

The transcript in front of you might be more helpful for you.

Mr. Alan Gray

Thank you very much, Deputy, and I'm very aware of the letter, as you can imagine, but I just wanted to have it in front of me in terms of answering you. So, in terms of when ... why did I write that letter and what was the nature of it and what was the content, I was aware at that stage that there was a very widespread perception both in Ireland and internationally that the guarantee had worked in terms of stemming the outflow of funds to the banks.

But I was very much aware - and these were the same points I was making in my letter of the 25th, before that decision was made - I was very much aware that there was significant risks for the exposure for the Exchequer.

And in that context, Mr. Gray, would you have advised Mr. Cowen, the then Taoiseach, in your telephone conversation that you believed the guarantee should only be for a year?

Mr. Alan Gray

I did not give a precise timeframe but I said it should be as short as possible, and I had in mind the fact that it was probably about exactly a year previously when Northern Rock went bust that the UK Government - and, I think, very wisely - did not say, "We'll give a guarantee for five years." They said, "This is a temporary guarantee to deal with an exceptional period of financial turbulence."

In the limited time I have, can you just summarise the key points you were making and what action was taken on foot of the letter of 20 October?

Mr. Alan Gray

Thank you, Deputy. So I said ... the key points I was making is that I knew that there were ... everyone was very involved in implementing the guarantee but I felt that we ... policy makers needed to focus on the effective risk management for the guarantee and the exit strategy. And I made that statement that the day we give a limited guarantee is the day we need to-----

Was there action taken on foot of your letter, Mr. Gray?

Mr. Alan Gray

So, if I can just very briefly come-----

I have very limited time now, Mr. Gray.

Mr. Alan Gray

I understand but I'm trying to, in the most effective way possible, give an answer to this. That was only highlighting a risk but in terms of what action was taken, I outlined what I felt was the action that was needed. And I said that that risk management strategy must have, really, changes in the regulatory process, including effective monitoring, assessment, quantification and control of risk. And I outlined a number of strategies that could be done to achieve that, actions to increase the capitalisation of the Irish-----

And did you get a response to the letter, Mr. Gray?

Mr. Alan Gray

I mentioned, Deputy, that on all of these letters, I would have got a phone call to say, "Alan, thank you for that and that will be considered."

Can I move on? You made reference in your document - annex 7 in Mr. Gray's statement - it relates to the meeting in Druids Glen, and you gave, effectively, your agenda. And I just had a quick look at the agenda, Mr. Gray. It's about 64 items in the agenda.

Mr. Alan Gray

Yes.

I think about eight of them relates in some way ... could be related to creditor banking. The first two ... the notes in blue underneath the main headings, when did you write those notes?

Mr. Alan Gray

I wrote those - and I state this in my evidence - I wrote those as my views of what was behind my thinking. They were the views that-----

When did you write the notes?

Mr. Alan Gray

So, I wrote them for the purpose of the inquiry.

So you wrote them post-Lehman's?

Mr. Alan Gray

I did.

And the first one speaks about that Ireland faces its most difficult economic challenge in over two decades and the scale of the challenge shall not be underestimated, and you speak about Lehman Brothers in that context. No. 2, you say, "Ireland has been hit by four main international developments, namely: global credit crunch"... was the No. 1 item you put in there. So, the question I suppose I want to ask, in that context, Mr. Gray: do you think it's credible to say that banking was not discussed?

Mr. Alan Gray

I certainly do. I mean, I was talking there about the international economic environment, and what I had indicated is that Ireland had been hit by four main international developments - the global credit crunch, the unprecedented increase in energy prices, the decline in investor and consumer sentiments and rising European interest rates-----

But you were in the room. Did the meeting take place at Mr. Drury's private home?

Mr. Alan Gray

It did.

Okay. What time did the meeting start at in the morning?

Mr. Alan Gray

My recollection is it was reasonably early in the morning, but I don't have the precise time-----

Are we saying 8 o'clock, 9 o'clock?

Mr. Alan Gray

No, I ... my recollection is it was about 10 o'clock-----

About 10 o'clock.

Mr. Alan Gray

-----but if someone told me it was 11 o'clock or 9 o'clock, I would not recall it at this distance.

And you were in the room ... like, were you aware of who would be attending that meeting prior?

Mr. Alan Gray

I was.

You were invited by Mr. Drury?

Mr. Alan Gray

I was invited by the Taoiseach, who asked me would I be willing to give up a morning to outline any views I had on what was happening in the economy and unemployment and what responses could take place-----

Mr. Alan Gray

-----and to my recollection ... is Mr. Drury rang me with the logistic details.

So you would've been aware at that stage that you had two current directors and the chair of the board of Anglo, you had one former director, Mr. Drury. Did you not think, in your role as a member of the Central Bank, at that particular moment in time, that it would be unwise to attend such a meeting?

Mr. Alan Gray

I didn't, Deputy.

Mr. Alan Gray

I didn't, Deputy, for a number of reasons. I was ... if I had been asked to attend a meeting on banking or Anglo Irish, I certainly would. But I was asked to attend a meeting where the chairman of Anglo Irish Bank was there and the chief executive of Smurfit Kappa - I wasn't even aware that he was a director of Anglo Irish Bank - and Mr. Fintan Drury, who was a friend and adviser to the Taoiseach on communication issues. I have been invited by many different Ministers and Taoiseachs to attend meetings, and I don't have a say... I don't control who the other attendees are but I did not see any difficulty with this.

And the final ... in this statement, in this annex 7, you give - on section 3, "Suggestions re Process and Indicative Timelines" - you go down through ... that, really, over the month of August, the Minister for Finance and the Government should do an action plan. Was any of this acted upon?

Mr. Alan Gray

I don't think there was specific action taken on that, to my knowledge.

Mr. Alan Gray

I'm not saying there was no action on any of the ideas. I think if one looks at what I said were the major areas that needed action, which is under the six areas that require a response, the first one was to improve competitiveness, the second one was to look at adjustments-----

But they were all ... I mean, I accept they were to implement the particular items you had discussed in this agenda. On reflection, Mr. Gray, why did you say earlier that it was a mistake for you to attend that meeting?

Mr. Alan Gray

Because I think - and I'll need maybe legal advice here, Chairman - is that there are certain issues that have arisen which I was not aware of, which would influence my views of whether I would now go to such a meeting.

But at the time of the meeting ... I'm only interested in the content of the ... and the context of then. Events subsequently unfold and all the rest of it; I'm not looking for that filter or that measure to be put in it.

Mr. Alan Gray

I understand.

Deputy O'Donnell is referring to the context of the meeting.

Mr. Alan Gray

I saw no mistake in going to the meeting at the time.

Thank you very much, Deputy O'Donnell. The next questioner is Deputy Eoghan Murphy. Deputy.

Thank you, Chairman. Thank you, Mr. Gray, and you're very welcome. Mr. Gray, I'd like to focus on your time as a member of the board of the Central Bank, if I may. You resigned from the board when exactly?

Mr. Alan Gray

So, I've seen some media statements suggesting that I was appointed in December 2006 and that I was on the board to 2009. I'm not quite sure the source of that information. It certainly isn't information I've given the inquiry, and I don't believe it's factually correct. Or actually it says I was there till 2008 ... September 2008. I joined ... I got my first letter appointing me, having agreed to join, when I came back from my break at Christmas. I got it in January and I attended my first board meeting at the end of January 2007. I remained on the board until the new Central Bank Commission was appointed. I was on the board that oversaw the appointment of Professor Honohan as the new Governor; I was on the board of the regulator that saw the appointment of Matthew Elderfield as the new regulator; and I was on the board that started to implement a very different form of financial regulation, very much in line, Deputy, with what I had earlier written to Finance and the Central Bank.

So you continued on past the guarantee and into ... easily into ’09.

Mr. Alan Gray

Yes.

I just wanted to clarify that because it wasn’t clear. You provided in your written statement your views on stress testing.

Mr. Alan Gray

Yes.

I wanted to know if you wanted to add to those because you do talk about one of the reasons why our own stress testing here in Ireland didn’t identify the problems. Without repeating yourself, is there anything you want to add to what you submitted in your written documentation?

Mr. Alan Gray

Thank you, Deputy. I think that I did have some further thoughts on stress testing, yes. Just in preparing for this session, Deputy, I went back through more detailed notes I had and I can’t quite remember whether I put this in my statement but the very first presentation on financial stability and stress testing that was made to the central board ... bank board when I was a member was at the end of March 2007, and I and a number of other directors asked for further work to be undertaken on five areas: the exposure to the decline in the price of building land; the consequences of the continuation of recent trends in credit; the effect of changes in interest rate on affordability and debt levels; analysis of the levels of provisioning and what would be the impact of a collapse in property prices. At a subsequent meeting of the Central Bank board, I and other directors asked for further work to be completed on three areas: commercial property; the buy-to-let market and the emergence of sub-priming.

Mr. Gray, can I just interrupt you for a second?

Mr. Alan Gray

Sure.

Because I want to ask what that implies. Does that imply that when you came onto the board you felt that the stress testing being undertaken wasn’t good enough?

Mr. Alan Gray

It didn't and I think that would be an unfair representation to make it appear that I-----

So, those were additional factors that you wanted to be undertaken.

Mr. Alan Gray

Exactly. Yes. And they did do additional fact research, including an examination of the details of a range of property price collapses. I have submitted that in part of my evidence to the commission and it has been deemed as not appropriate for me to put into my evidence because of section 33AK but I am happy to talk in a more general way about that if that would be helpful.

One of my colleagues might be able to come back to that. There were a couple of other things around that I wanted to ask. The other question was in relation to you or your company ever being employed or contracted to do additional work for any of the individual banks on their own stress testing or any measures like that.

Mr. Alan Gray

Never.

Okay. So you had no independent knowledge of the banking system separately from your position on the Central Bank board.

Mr. Alan Gray

Well, I had some knowledge of the banking system internationally from our work for the European Commission and we have done work for the financial services conduct authority in the UK and for other clients but I had no information from any Irish banks other than the information which was available to the regulator and the Central Bank.

If I could move on to the meeting of 25 September 2008-----

Mr. Alan Gray

Sure.

-----and a note you provided in to Kevin Cardiff. It’s page 34, Vol. 1. One of the initial points you put down is the danger of a system-wide response being seen to be too weak, “Any system wide initiative ... must be seen as sufficient so ... there is not ongoing initiatives launched.” Is that in effect you saying that anything that is done needs to do the job and do it in one go, if you like, because we heard something similar from Mr. Hurley when he was before the committee? So I’m wondering if when he put that view into the room on the night of the guarantee it was because of the conversation that the Central Bank would have had, but because of that view that you held in particular.

Mr. Alan Gray

I can't interpret why Mr. Hurley made any comments but I can certainly account for my view on that, Deputy, which was there ... in every banking crisis there is a real danger of piecemeal action which subsequently leads to more and more piecemeal action and actually causes a much greater problem.

That is the sufficiency that you were talking about.

Mr. Alan Gray

Yes.

A final question, if I may, because I’m close on time, is, when Mr. McDonagh was before us from the NTMA, in the inquiry, and he was talking about the night of the guarantee but also the preparations leading up to it and what he understood and the view of the NTMA and he said in page 91 of the transcript, it says, this is Mr. McDonagh: "I think it was about 1 o'clock, I think it was about 1 o'clock in the morning when Kevin came out of the room and says ... said 'The Government has made a decision to ... do a blanket guarantee', and I was flabbergasted because all the work had been about preparing for [nationalisation, excuse me,] nationalising an institution." So, can you ask how the NTMA might have had that view right up until the moment of the guarantee, whereas the view of the Central Bank from the 25th was it’s going to be a guarantee?

Mr. Alan Gray

Well, I don't think it was actually the view of the Central Bank that it was going to be a guarantee but on the meeting of the Central Bank board on the 25th, the only option that was presented was one to give a guarantee to the six financial institutions-----

You mentioned the NTMA was in a meeting on the 24th, the day before that.

Mr. Alan Gray

And we were informed that the NTMA were at a meeting the previous day with the Central Bank, the regulator, the then Minister for Finance and their teams of advisers and the outcome from that meeting was the proposal that was being put for consideration to the Central Bank board, and I wasn’t at those meetings that Mr. McDonagh was at on the 24th but I am outlining what we were told as Central Bank directors the next day and what the formal signed-off minutes by everyone shows was the case.

But is it possible that someone attending the meeting on the 25th being informed of what was discussed on the 24th might have misinterpreted this in some way to come to the conclusion that Mr. McDonagh had come to that-----

Mr. Alan Gray

It certainly is.

It is possible.

Mr. Alan Gray

That is certainly possible but ... and it’s certainly possible that ... you know, that’s certainly possible.

How is that possible if the meeting is so clearly recorded and that’s your clear understanding that the guarantee was the option being discussed-----

Mr. Alan Gray

Yes.

-----that someone would be able to say then or come to a view from that that all the work had been about preparing for nationalising an institution? How can you take that from-----

Mr. Alan Gray

I'm afraid I can't answer that question.

But you think it’s possible that someone could do that?

Mr. Alan Gray

I think it is possible, you know, because I assume that the meeting on the 24th - and I have no knowledge of this - might have considered a range of options but came to a particular view that they were looking for to express to the Central Bank the next day.

Can you think why perhaps they might decide to give, or could they or would they, give a view to the Central Bank but be doing other work that they wouldn’t inform you of, that might be equally as valid an option?

Mr. Alan Gray

That isn't anything I could make any comment on, Deputy.

Thank you. Deputy Higgins.

Mr. Gray, your private consultancy company is called Indecon, correct?

Mr. Alan Gray

That is correct.

When was that founded?

Mr. Alan Gray

That was founded about 25 years ago, I think, Deputy.

Okay. And you have done over the years, over the decades, work for the Irish Government and the Department of Finance.

Mr. Alan Gray

That is correct.

Would you ... how would you describe your company’s relationship with Government officials and the Department of Finance in this State, and if you would differentiate between that relationship before your time of appointment to the board of the Central Bank and the regulator, during your time, and then since you resigned?

Mr. Alan Gray

Thank you, Deputy. I think the relationship of the Indecon research economists with the central ... with the Department of Finance or with the Taoiseach’s Department, or any other Government Department, would be seen very much as an independent view on issues and I often say to some of my economists that if someone is looking for a view rubber-stamped they will certainly not ask Indecon for our view.

I have heard, Deputy, about lots of major consultancy and, you know, advisory and research work being given to different practices for particular reasons, but not through public tender, but that has never occurred in Indecon's case.

And did you also give advice or represent in some capacity, major banks?

Mr. Alan Gray

Our research practice has done work in the financial services sector, including for banks. Most of the work in financial services we've been undertaking internationally have been for regulators, such as the UK Financial Conduct Authority, and we did a very major study that you might be aware of for the European Commission on how to protect consumers in financial difficulty. And I'd like to just particularly answer the question about banks. The only bank that we have ever done any research project work for was Bank of Ireland. It was never in relation to any issue that was related to regulation or related to any issues before the Central Bank.

So do you feel there was ever a conflict of interest between your company's advising Bank of Ireland, say, and your role on the Central Bank?

Mr. Alan Gray

Deputy, if I ... if we were advising them on Central Bank issues, I would have felt there was a conflict of interest, but that has never been the case. And as soon as I was appointed to the board of the Central Bank, in January 2007, I wrote to the Standards in Public Office Commission, described the type of work we had done for Bank of Ireland and asked did they consider there could be any material conflict of interest. And I got a formal response from the Standards in Public Office Commission on 9 February 2007, which said there is no basis to conclude that there could be material influence in the performance-----

That's clear enough, Mr. Gray. I'll move on for time reasons.

Mr. Alan Gray

Of course.

You say in your opening statement, page 4, written one:

However, [this is in relation to the bank bailout etc.] I believe their decision to subsequently force Ireland to avoid imposing losses on bond holders and requiring Irish taxpayers to then bear the cost was morally indefensible. It was one of the worst examples of a small state being forced to socialise losses (i.e. for the taxpayers to pay the costs) while the private sector gains were protected.

And you also said under the paragraph, "Week of Bank Guarantee", page 16:

The Bank Guarantee decision resulted in Irish citizens having to pay a very high and unjust cost for the banking crisis. Providing a linkage between the sovereign and the liabilities of the financial institutions proved to be a very costly decision.

Mr. Gray, is this by way of recanting from your support and advocacy for a bank guarantee? Because, obviously, the bank guarantee was the origin of why the sovereign and the taxpayer were eventually saddled with this massive debt.

Mr. Alan Gray

So, there is no recanting, Deputy, and I'd like to deal with the key elements in what I'm saying. I could understand that the ECB, for international financial stability reasons, might require and make a decision that bondholders shouldn't be burnt at any particular time because of the impact on world financial markets. What I feel is that would be an extremely unjust decision if that was a decision that was made but when combined with the requirement that to meet that worldwide international stability objective one member state would have to pay the cost, was morally indefensible, and I don't make those comments lightly. The guarantee ... that is about burning the bondholders. The guarantee issue is ... the guarantee was an unjust decision but was, in my view, the sensible decision, even though it was unjust, given the terrible options that were available.

Mr. Gray, you also said on page 9, "Regulatory systems did not cause the crisis, but did not prevent the practices which led to the crisis." Most fundamentally, what caused the crisis, in your view?

Mr. Alan Gray

I think I outlined, Chairman - or not Chairman, sorry, Deputy - a number of key factors. I think there was two major international factors that were of critical importance. One was, with the enthusiasm for having a euro, people ignored the design faults in the euro and did not put in place the institutions necessary to make that work, and my view is that that is still the case, unfortunately.

Mr. Alan Gray

And the second was the Lehman Brothers collapse. And I know the international agencies and the large countries like to downplay that and put all the blame on member states, but I don't accept that.

Mr. Alan Gray

But, within Ireland, then I think there was a range of fundamental mistakes.

Mr. Alan Gray

The mistakes made by the banks themselves.

Okay, and on that point - and this is my last point because I'm out of time, Mr. Gray - more fundamentally still, is it appropriate that in a democratic society private financial institutions, which hold enormous power over society, are able to profiteer and speculate at will, and blow up such a massive bubble that then creates, when it crashes, such havoc? Would you not say that that's a more fundamental reason that they have that right or not and the greed for super profits?

Mr. Alan Gray

Well, I certainly agree that they should not have that right.

But isn't that fundamental to how the capitalist financial markets operate?

Mr. Alan Gray

Well, I think that a bank that is prudently managed, properly regulated in an economy with appropriate macroeconomic policies, without inappropriate intervention in the property sector, would not cause a crisis. So, I don't think it's the fact that they're commercial organisations that are the problem. The problem is the mistakes made within the banks and the failure of the regulatory system to stop them making those mistakes, and the fact that that fuel which ... this crisis is all really about what happened in property and was fuelled by inappropriate tax incentives.

I am going to invite Senator O'Keeffe, and I'm going to propose just a five-minute comfort break after that. Senator O'Keeffe.

Thank you, Chair. Mr. Gray, did you give any advice to the Taoiseach or anybody else in the Government relating to the troika bailout, or the establishment and operation of NAMA, or the nationalisation of Anglo Irish Bank?

Mr. Alan Gray

So I'd like to deal with each of those questions, Senator. Well, there are three different questions.

No, that's fair enough so, Chair, you'll just amend the time. Thank you. Yes, please.

Mr. Alan Gray

I did not give any advice in relation to nationalisation. I did not give any advice in relation to the bailout but I did point out in the evidence that I submitted that I and some other external economists were invited to a meeting in the Department of Finance, some time in October, to give our external assessment of what was likely to happen in the economy and what would that mean for public finances, and that was prior to the bailout. But I put that in for full disclosure in case people would be saying, "Well, that was actually related to the planning for the bailout," and it may well have been.

Mr. Gray, you have, as I think one of my colleagues has asked you, you've done consultancy work for very many Government Departments over the years. That's correct. I think you also worked for the Department of Industry and Commerce at one stage.

Mr. Alan Gray

That was, I think, my first, well, my second job as a young economist.

And you worked for the Central Bank as well when you were younger, I think.

Mr. Alan Gray

I was when, I think, I was 18 at the time.

And just to check, forgive me, you said you did some consultancy work for the Bank of Ireland but not for any other banks. Is that correct?

Mr. Alan Gray

That's correct.

And did you do consultancy for the Quinn Group, or for Quinn Insurance or for any of the Quinn Group?

Mr. Alan Gray

No.

No, okay. When you were appointed to the board of the Central Bank, you say in one of your annexes that you decided to talk to some of the heads of departments and the management team, I think, in the Central Bank.

Mr. Alan Gray

Yes.

You took it upon yourself to talk to them. When you did that, did you speak to Mr. Frank Browne?

Mr. Alan Gray

So what I was referring to was the heads of departments in the Financial Regulator board, not in the Central Bank board. And the reason I took that view was the Central Bank board was very much an advisory board that looked at general economic developments. As an independent economist, I would assume that if there had been any contrarian views - I am, despite what might appear in this session ... am an extremely informal individual and I would be known in the economics profession, and people would ... I assume, if anyone had any different views ... would have come to me. And economists, by their DNA, are hard to stop giving their views.

But on the regulator board, when I was appointed I thought, maybe because the Central Bank and the regulator was a sort of a hierarchical and a deferential type organisation, I thought it would be important to ensure that there were no views about problems or particular issues which were ... people didn't feel at liberty to express to the board, and I asked could I meet all the department managers on a confidential basis, one to one.

Mr. Alan Gray

I know a number of them expressed some great surprise when they were meeting me. And some of them came in and said, "Why do you want to meet?" And I said, "I want to meet because if there's any views you want to express, please express them."

Did you speak to Mr. Browne?

Mr. Alan Gray

No. Mr. Browne didn't work for the Financial Regulator.

That's fine, I am just checking. That's fine.

On the night of the guarantee when you got the phone call from Mr. Cowen, can you recall, Mr. Gray, what time it was when you got that call?

Mr. Alan Gray

It was late in the evening but I don't recall the time.

Did Mr. Cowen indicate that there was any agreement or disagreement in relation to where the conversation was heading? Did he say that anyone was favouring one thing or the other, and that he was, if you like, caught in the middle and was not sure? Can you tell us about that?

Mr. Alan Gray

Sure. He didn't, and he didn't tell me what the Government were likely to do. He asked my view. He said it was being considered to give a guarantee to the banks and what did I think was the market reaction, and did I have any views on them. It was the very same option that was raised at the Central Bank board meeting-----

Mr. Alan Gray

-----and I gave my same views that I gave at the Central Bank board meeting and subsequently in the letter, but in a much more shortened version.

And was he ... was it a conference call or was it just you and him, or were you aware was anyone else listening to the conversation?

Mr. Alan Gray

I assumed it was just a direct call-----

Mr. Alan Gray

-----and I had no sense it was a conference call.

And did he indicate that the Minister for Finance was favouring nationalisation?

Mr. Alan Gray

He did not.

You met with the Minister for Finance, I think, on 7 September. Can you tell us what that meeting was for?

Mr. Alan Gray

My best recollection of that meeting was that he asked could he meet me to give my views on what was happening in the economy and what was happening in the labour markets. And one of the issues I recall making to the Minister at the time was that it was very important that, in looking at policy responses, it wasn't confined just to a public finance response.

So you didn't talk about banking and you didn't talk about the state of the banks, because it would have been coming back after the summer and things would have been starting to kick-off again, and the crisis would have been starting to make itself felt. So you're saying it was just about the economy and not about the banks.

Mr. Alan Gray

That is my recollection, Senator, but I could not be 100% clear in my recollection of whether he asked me anything about the international financial markets. But there was no specific discussions on any banking issues, to the best of my recollection.

Going back to Druids Glen, if I may,-----

Just wrap up, Senator, please.

Thank you. You said that the Taoiseach had asked you to come because-----

Mr. Alan Gray

That's right.

-----because, obviously, you knew the Taoiseach. And did he ask you by way of a phone call or an e-mail, and when he-----

Mr. Alan Gray

By phone call.

A phone call directly to you.

Mr. Alan Gray

Yes, directly to me.

And when it was ... when Mr. Drury explained to you that this meeting would take place in a private house, in his house,-----

Mr. Alan Gray

Yes.

-----what was your opinion of that, because under normal circumstances I am sure you would meet the Taoiseach or a Minister in their own office, not in someone else's private house? So, how did it arise that you agreed to meet them in a private house?

Mr. Alan Gray

I had no difficulty in the location of the meeting, Senator. I would have met respective Ministers of all parties in different locations. I remember, when I was a young economist, being invited by Dr. Garret FitzGerald when he was Taoiseach, to meet him in his house in Palmerston Road.

I was given the directions to the location of this off-site meeting. I'd never been to the house before. I've never been to the house since. It was a logistic issue, I understood, because it was a few minutes away from Druids Glen, and I had been informed that the ... some of the other parties were going to play golf subsequently which, as you know from my statement, I wasn't invited.

You don't play golf.

Mr. Alan Gray

And I don't play golf.

Finally, if I may, Chair,-----

Quickly, quickly.

-----when you put your outline ... your schedule and your agenda, it is clear that the schedule or the timeline that you gave for what you were proposing by way of a restoration of the economy, was stunningly tight. You know, you were talking about-----

Mr. Alan Gray

Yes.

-----Government agreeing in two weeks. In fairness, you know a lot about the way government works and you know that most people take a holiday in August, and your timeline was, if I might suggest, very ambitious indeed. So it looks like a very ambitious project that, if you like, really didn't fit with the kind of meeting. It looks like something from another day or another time that would have required a huge big meeting with a lot of people, and not that kind of meeting. And I am just asking did you have another purpose when you wrote that document originally and did you then think, "Oh, I'll take that with me because it would be useful."

Mr. Alan Gray

Certainly not, and the timescale was very ambitious. But one of my frustrations as an economist, not only in Ireland but in other European countries, is how slowly governments tend to move and I knew there was a looming crisis. I felt that the response to date by policymakers was inadequate and I pointed that out - it's printed in the document that I circulated.

And how did that go down at the meeting when you said that?

Now I need to break, Senator.

Yes, I know. How did that go down when you made yourself ... your views clear?

Mr. Alan Gray

I felt that the then Taoiseach did not take any offence at that remark and was open to, you know, my views on what was happening. I felt the official CSO statistics had a lag and they weren't telling the real crisis in the economy that was happening.

Thank you. It's just coming up to 5.30 p.m. I am just proposing a very short, five-minute break. In doing so, just before we do break, I just need to ... just let Mr. Gray know and inform him that once he begins giving evidence, he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until 5.35 p.m. and remind the witness that he is still under oath until we resume. Is that agreed? Agreed.

Mr. Alan Gray

Thank you.

Sitting suspended at 5.29 p.m. and resumed at 5.41 p.m.

Okay, I'm going to propose we go straight back into public session. Is that agreed? I just want-----

Yes, what?

Could I have a point of clarification when you're ready?

Quickly now, please.

Yes, sorry. Mr. Gray, can I just clarify when you were on the phone to Mr. Cowen, was the subject of the Quinn Group, or the contracts for difference, or the dangers they were posing to Anglo, was that raised at all-----

Mr. Alan Gray

No.

-----in the conversation? No. Thank you.

Thank you.

Thank you, Chair.

I just want to deal with one ... just one outstanding item, another question, and then I'll bring in Deputy Doherty. Mr. Gray, in your witness statement you advise:

In attempting to respond to the crisis, extensive use of external advisers was made by the Department of Finance. This included both international financial and legal advisors. Their advisory reports were not shared with the Central Bank non-executive directors and I have only briefly seen some of these subsequently when they have been publicly released.

Were you surprised that the advisory reports were not shared with the Central Bank non-executive directors?

Mr. Alan Gray

Not particularly, Chairman. Obviously, as an economist, I like to have full information on everything but I do respect that different parts of the government system decide what they should or should not share.

What was the rationale for the suppressing of information for non-executive directors, that there would be this, sort of, editing process? What would you understand this to be rationale?

Mr. Alan Gray

So, I'm not sure there was any suppression-----

Mr. Alan Gray

-----but there ... because that is a deliberate act to do something but I have no idea why that information was not shared. And, indeed, some of the material that you sent me in my core book of evidence I had not seen previously.

And did this lack of confidential information, and some of the information on which you've said you've subsequently seen, impact upon the board's knowledge, its functionality or its performance?

Mr. Alan Gray

I don't believe so.

Okay, thank you. Deputy Doherty.

Go raibh maith agat agus fáilte. Can I ask you, Mr. Gray, in minutes you provided to the committee from the Central Bank board, and in your statement as well, we see that the issue of the six-bank guarantee was raised? And a copy of the same minutes that this committee has access to - the reference from the secretariat is core book, John Hurley, Vol. 3, it's on page 33 ... and we see that the Governor told the board, which you attended, of the need to get the two pillar banks on board with the idea of a six-bank guarantee ... and that the Governor went on to say that he would need to talk to the two banks "who to date have been negative on such a proposal". You go on to say in your statement, on page 17, that "there was no suggestion at any time of any option to guarantee some banks but nationalise others, yet we know from evidence from AIB and Bank of Ireland that this was their preferred option ... of those two banks. And, obviously, we know from the board minute that you were informed that AIB and Bank of Ireland were not on board with the six-bank guarantee option. So, what then was the discussion around the need to convince the two pillar banks of the necessity of a six-bank guarantee?

Mr. Alan Gray

Sorry, Deputy, I'm just trying to get the precise-----

Yes. You left that bit out from the minutes that you provided ... the bit that talked about the need for AIB and Bank of Ireland to get on board with this, and that they were opposed to this prior to this, to that point.

Mr. Alan Gray

I'm sorry, Deputy. I'm just trying to see the particular reference there ... maybe, is it possible-----

If we have John Hurley's book please, Vol. 3. Can we get that, JH, Vol. 3, page 33? It's the next page ... and there it is. So, the minutes ... you've provided these minutes, but the last ... the second last bullet point there wasn't provided, which is, "There was a need to talk to the two banks which to date have been negative on such a proposal." The two banks ... we've seen these bullet-----

Mr. Alan Gray

Sure.

-----minutes as well and this is a version for the public, but these two banks were, obviously, AIB and Bank of Ireland.

Mr. Alan Gray

So, I'm so sorry, Deputy. Maybe just give me the question again. I was just trying to focus on the reference. I don't actually see it but I do recall it in the minutes but I just don't seem to have it in front of me.

The question is, Mr. Gray-----

Mr. Alan Gray

Yes.

You were informed at this meeting that you refer to in your statements that AIB and Bank of Ireland were not in support of a six-bank guarantee-----

Mr. Alan Gray

Yes.

-----and that they would need to be got on board with such an option.

Mr. Alan Gray

So, I'm sorry, I'd just like to see the precise wording of-----

Well, the wording that we have, that's available to the public, is this third bullet point from the bottom is ... this is from the Governor ... "There would be a need to talk to the two banks which to date have been negative on such a proposal."

Mr. Alan Gray

Yes and I'm just trying to find the reference in the formal board minutes which I did supply to the committee.

You don't include that part in the minute.

Mr. Alan Gray

In the minutes at all?

Mr. Alan Gray

Oh, yes.

You've included all of the other minute, but you've deleted ... or not deleted, sorry-----

Mr. Alan Gray

No.

Mr. Alan Gray

Yes.

You've left out a paragraph which talks about the fact that AIB and Bank of Ireland were not supportive of this proposal to date and that there would've been a need for the Governor to-----

Mr. Alan Gray

I understand, Deputy.

-----talk to them.

Mr. Alan Gray

And apologies. The only reason I left that out of the board minutes was that I was proposing that all of the annexes that I had submitted would be publicly released, and because it referred to two specific institutions it was my interpretation under section 33AK that I might be breaching that to include it in my evidence. The legal advice to the commission is that I can't include any of that in my public evidence, so that was the only reason for that. My recollection of the minutes ... and not the minutes ... my recollection of the meeting was the Governor explained that there had been discussions with the banks prior to this issue coming before the board of the Central Bank. And he explained that the major banks had up to this date been against a guarantee but that, given the evolving liquidity position, that their view may have changed, and that the Governor and the Department of Finance were going to continue their discussions with the banks.

And is your information that the discussions in relation to this proposal was with how many banks and which banks?

Mr. Alan Gray

So, I have no knowledge of that.

There is phone interference there now coming in, folks. Sorry, just one second now.

Mr. Alan Gray

So, Deputy, I have no knowledge of what discussions took place and there was no details of what discussions were likely to take place or with who, but I would've assumed it would have been with all the major banks.

But, sorry, there was actually detail, just to-----

Mr. Alan Gray

Sure, yes.

-----put that on the record, because we have the evidence. There was ... you were informed that discussions would need to take place with the AIB and Bank of Ireland, and you were informed that AIB and Bank of Ireland did not support a six-bank guarantee.

Mr. Alan Gray

That is correct, yes.

My question is to you: were you informed in relation to whether that issue, as you say, was discussed with the major banks?

Was Anglo Irish Bank one of the banks that this issue was discussed with prior to this meeting?

Mr. Alan Gray

That's what I'm ... that's what I was trying to indicate, Deputy. I have no knowledge of that.

So, you know what happened with AIB and Bank of Ireland-----

Mr. Alan Gray

Correct.

-----that there was previous discussions about a six-bank guarantee-----

Mr. Alan Gray

Yes.

-----but not with Anglo Irish Bank or any other banks.

Mr. Alan Gray

And it may or it may not. I was not even aware that there was any discussions with the banks on particular policy options until that board meeting.

Okay, can I ask you in relation to going back, unfortunately, to the issue on Druids Glen and you talk about your conflict in terms of the privacy that you've had and the confidentiality that you've kept in relation to clients or people that you've provided advice to and the fact that you felt that you needed to make a public statement to bring clarity to the public in this matter? Can I ask you in relation to the public statement that you include here to The Irish Times where you say you were invited to attend an informal dinner with the Taoiseach in Druids Glen; "The purpose of the invitation was to provide independent ideas [and] stimulate economic growth and to reduce unemployment in Ireland"? Could people suggest that that was misleading in the way that you weren't invited to a dinner in Druids Glen to discuss unemployment and the economic growth in Ireland until you actually were invited to a private meeting in a private residence of a former director of Anglo Irish Bank and, when that meeting hadn't concluded, you were asked to attend a dinner?

Mr. Alan Gray

So, I think it is very evident that I was invited to that dinner to provide a continuation of a discussion but I did not refer to the previous discussion. And the reason I didn't; I was trying to balance my approach which would not be to normally issue statements to the media about policy discussions with any governments and when this broke I, as I have mentioned, I was extremely ill and I was trying to make a decision of what to release to balance my normal confidentiality arrangements and to respect people's privacy but yet to put out in detail what the content of that interaction was about. I was aware that the house we were in was an ordinary family home. I did not know whether Mr. Drury had children or not and I felt I would be breaching a personal issue of normal privacy and I didn't think it mattered, the location of it.

I appreciate that and in relation to ... did you give any thought to the fact that you were making a public statement that this dinner and this discussion happened in an open forum in a hotel with a Garda driver present where, indeed, the substantial discussion happened in a private residence behind closed doors with no garda present and only the Taoiseach and three other connected senior persons with Anglo Irish Bank? Did you consider that that would be the type of detail maybe that the public would have been looking for at that time, instead of corroborating what had already been released through questions to the Taoiseach in the Dáil?

Mr. Alan Gray

I think all of the other participants chose to make no statement. I felt it was important to make a statement to deal with what was the nature of this discussion and I made that decision realising that I would be breaching my normal approach to respecting people's privacy and confidentiality but I felt it was important to have that in the public domain.

Mr. Alan Gray

And I did not think there was any issue about it being, you know, behind closed doors. Most meetings that I would have with Government Ministers would be behind closed doors. You know, in general you don't have them out in open, but I didn't think there was any attempt to hide the fact a discussion was proceeding. If there was, you know, one would hardly choose a public golf course hotel to have an open discussion and dinner. It wasn't in a private room in the hotel, it was in the general just-----

Okay, Deputy.

Okay, can I finish on this point here just in relation to the notes that you provided in terms of the-----

Mr. Alan Gray

Of course.

-----not the agenda, but the document or the points of discussion that you brought to the meeting? These have obviously been ... this document has obviously been altered, as you've outlined to the committee, since that meeting. Can you provide the committee with the original documentation if you still have access to it and can I ask you the point in relation to a number of the measures? The number of the ... a number of issues that you were discussing with the chairperson of Anglo present and two of the directors was, for example, additional equity for investment in start-ups; measures for credit fund for home ownership; we have guarantee that mortgage interest tax breaks wouldn't be reduced when the Government would have to implement different austerity measures; social housing ... local housing ... social housing being sold back to the owners to invest in construction. Some of these matters - and it was touched on by one of the Deputies-----

Last question now, Deputy.

-----it is very much about credit in the economy. How is it possible to have senior bankers in the room, somebody from the Central Bank and talking about measures that you believed would introduce credit for the ... in the economy ... for people to buy their own house - consideration of a home buying scheme was another measure that was on the agenda - yet no discussion in relation to banking? Like, was the chairperson of Anglo Irish Bank, you know ... this obviously, like these ... some of these measures - it's stated in it - that it would be in conjunction with the State and the financial institutions. How ... is this not banking that's being discussed?

Mr. Alan Gray

So, a couple of points, Deputy. You suggested that the document was altered. It was not altered. I highlighted in blue my interpretation of what I was discussing under each of the headings. I can, of course, supply the commission with the original documentation but it is identical to the document that you have, which has all the points in black other than the ones in blue. The issues, if I can go on to the particular areas that you're raising, were not about banking. They were about trying to deal with what I felt was the escalating unemployment position and the issue of social housing I don't think had any relevance to the banking sector. It was something that I felt very strongly about and normally in a context like this, one would not disclose information like this, but I came from a family that was homeless at one stage and I ended up in local authority tower blocks in Ballymun and I know the importance of people not having a house and this was a policy issue which I felt would have a social benefit and which would help create employment. It was nothing to do with banking.

Thank you. Deputy McGrath, please.

Sorry-----

Sorry, Chair, but there was specific measures - because in fairness to Mr. Gray, you did answer the issue on social housing - but there are specific measures here where you proposed co-operation between the State and financial institutions, which I presume would be Anglo Irish Bank as well, with the chairperson of Anglo Irish Bank sitting there with two directors there, where there would be working relationships between State and financial institutions. Is that ... I'm wondering how could the conversation not evolve in relation to banking. It's just, you know, somebody put it to me that-----

The proposition has been made. I'll let Mr. Gray respond to it.

Mr. Alan Gray

Yes. So, it didn't and none of those issues would be relevant to Anglo Irish Bank. They weren't in the general residential mortgage market. When I was looking at consideration of a home-buy scheme, I was referring to a social initiative in the UK to have a similar scheme. I outlined similar schemes in New Zealand. These were not issues about banking.

I think any objective economist would look at these and say these are issues about an economist identifying the scale of the crisis which had not yet been interpreted.

Thank you. Deputy McGrath, please.

Thank you very much, Chair. Good afternoon, Mr. Gray. Just if I can take you to that letter of 25 September '08 addressed to Mr. Kevin Cardiff, and you have spoken about this at length so we should be able to get through these questions quite quickly. There weren't any terms of reference for that paper, I think you've confirmed that. It was your own initiative following the discussion that you had just attended at the Central Bank meeting. Can you outline the supporting evidence and analysis you placed the greatest emphasis on when preparing this or what documents did you have regard to or was it just from your own mind that you prepared this paper?

Mr. Alan Gray

Thank you, Deputy. It wasn't from any specific documents that I prepared it to but it was based on my very rigorous interpretation of what was the scale and nature of the issues that were facing the banking sector from my role in the Central Bank. In my role as chairman of London Economics, we have experience in about 80 countries internationally.

Mr. Alan Gray

I've advised on countries as diverse as Cuba and Germany and all sorts of countries and I was aware of international experience in a number of these areas, and it was based on that analysis. I had indicated to the Department of Finance and to the Governor that I knew they had their own teams of advisers but I believed in sharing my inputs, for what they were worth, outlining the need to look at a wider range of options. I put the ECB option as the very first one because I felt that that would be the normal response. If this was in the US, the Federal Reserve would have been taking actions-----

Mr. Alan Gray

-----rather than individual states. And the other issue I was very keen to highlight, based on my analysis, was this wasn't just a liquidity issue. There was four challenges facing ... and I was concerned that everyone might think there was one. There was: to improve liquidity in banking; to deal with issues in individual banks; to reduce the State exposure; and to restructure the sector.

And that's all set out in the paper.

Mr. Alan Gray

Yes.

And just to clarify, in preparing this paper on that evening, you didn't consult with anybody else?

Mr. Alan Gray

I did not consult with anyone else.

Okay, and the recipients were Mr. Hurley, Mr. Cardiff, to whom it was addressed, and the ... David ... is that David Doyle?

Mr. Alan Gray

David Doyle, yes.

So he was sent a copy as well.

Mr. Alan Gray

And my recollection, Deputy - but I can't be 100% sure of this - is that I would've also sent it to the chairman of the financial regulatory authority because that tended to be my approach to make sure there wasn't "silo thinking" in coming to a very important policy decision.

Sure, and apart from the Central Bank authority meeting, which informed your decision to write this paper, did you have any direct discussions before writing this or, indeed, after this ... after writing it, with Mr. Doyle and Mr. Hurley about this paper?

Mr. Alan Gray

Only to say I think I probably rang the Secretary General of the Department to tell him that-----

Mr. Alan Gray

-----I was couriering a letter to him and I would have done the same with the Governor of the Central Bank but they ... I would have had no discussion on the content of it-----

Mr. Alan Gray

-----or subsequently.

Okay, and with the Minister for Finance, Mr. Lenihan, did you have any direct discussions with him around this time?

Mr. Alan Gray

I did not.

No. And can I ask, Mr. Gray, at that time, were you the beneficial owner of any shares in the Irish banks or ... either directly or through investment portfolios that you might have had a share in?

Mr. Alan Gray

I had no shares in any Irish bank and I had no commercial property interests.

Sure, and that would ... no shares in Irish bank would extend to include any investment portfolios that you had?

Mr. Alan Gray

It would.

Were not invested in the Irish banks?

Mr. Alan Gray

Yes.

Thank you. Can I ask you: when did you first realise that additional capital would have to be injected into the banks?

Mr. Alan Gray

I felt ... certainly in early October, I felt that there was a likelihood of the need for additional capital in the banks and in terms of my views on that ... it was based on emerging research that was coming from the PwC and other analysis that I knew that that might be a possibility. It was also a feature of probably every banking crisis that banks subsequently needed some additional capitalisation.

Mr. Alan Gray

But, just so I am very clear, Deputy, it wasn't until really the start of January 2009 that I became very convinced of the need for additional capital in the banks.

Sure. But just to clarify this point because the ... you know, early October is only a few days after the end of September-----

Mr. Alan Gray

Yes.

-----and by 20 October, you were writing to Kevin Cardiff specifically addressing issues around the capitalisation of the banks and the possibility of additional capital being needed. That was followed up with a further letter on 19 November, which is in annex 6 ... 16 rather, which you provided to us. So, my question is, when you were preparing the paper on 25 September and, indeed, when you had the discussion with the Taoiseach on 29 September, was it anywhere in your mind at all that providing a guarantee for the banks would inevitably have to be backed up by injecting additional capital into those banks?

Mr. Alan Gray

It wasn't my view that that was a certainty but it was my view that that would be a possibility.

But it isn't referenced, to my knowledge, in the paper - is it - of 25 September?

Mr. Alan Gray

No. I felt there was ... on 25 September, I felt there were four issues that needed to be dealt with. The first one was the issue of liquidity ... that I felt that there was a restructuring and action in individual banks that would be required. And if one looks at the actions to reduce risk and potential Exchequer exposure in specific individual banks, which I outlined, I identified three options: one, management changes; one, restrictions on loans; and, thirdly, a managing down of the loans. And that is really an ... like, banks need capital depending on their scale and size and there's two ways of really addressing that - one is to put in more capital or one is to scale down the organisations. I also felt that in relation to banks, the best option, if it was feasible, would be to sell the banks or sell part of them to a institution that would have a wider capital base. And in my response to individual banks who had liquidity issues, the options that I had outlined was to seek a trade sale as a strong ... to a strong, credible institutional buyer and I pointed out that that was the best option and should be pursued but it was unlikely to be feasible in the current circumstances. So there was ways, in dealing with the potential issues that would need to be dealt with subsequently, that might have, you know, have involved responses other than the State putting in capital.

Sure, but the paper makes no reference at all to the possibility of the State having to put in capital.

Mr. Alan Gray

It doesn't but I was attempting, after a long Central Bank board meeting, to give my individual views on what I thought was the key issues and I mightn't have dealt with everything-----

Mr. Alan Gray

-----but I was outlining what I thought were points that the Department and the Central Bank should consider.

But by 20 October, you were writing directly about the State injecting capital through the pension reserve fund or other sources in exchange for preference equity shares. That was one of the options you were specifically setting out.

Mr. Alan Gray

An option, yes.

Mr. Alan Gray

And it was in January 2009 that I had come to the firm view that additional capital was required. The banks had been told to do very detailed stress testing and they came back and said that they didn't need additional capital to meet regulatory requirements and to deal with the levels of expected bad debts. And some PwC scenarios were suggesting the same issues and I just did not believe that was correct.

Sure. Finally, do you now believe, looking back, that in your discussion with the Taoiseach on the night the guarantee was decided or a number of days previous when you did take the initiative to document some key points and key challenges that the State was facing, that you should have identified the likelihood, or the possibility at least, that the State would have to inject money into the banks by way of recapitalisation?

Mr. Alan Gray

I don't have a firm view on that, Deputy. I'm very open to people saying I didn't identify all the issues but I haven't really thought about that particular question.

I only ask it because, you know, less than a month later you wrote a specific paper on the capital requirements of the banks, which included the prospect of the State injecting capital and this was before the State had made any announcement that it was likely to have to inject capital into the banks. That came, I think, on 28 November ... was the first reference by the State. So you seemed to realise very, very quickly after advocating the possibility of a guarantee-----

Mr. Alan Gray

Sure.

-----that it would involve the State injecting money into the banks.

Mr. Alan Gray

I think, first of all, I didn't advocate a guarantee. I was outlining the need to look at other options and to outline the risks in relation to a guarantee and I felt ECB action was a more appropriate action. But I have seen almost in every case whereby worldwide liquidity markets become into significant difficulties, the interaction between solvency and liquidity changes and that requires additional capital. The regulator was being asked to send in teams of accountants to come up with an assessment of whether capital was needed and I did not have certainty on that time of whether it would or not.

You say you were not advocating a guarantee, but if you look at the paper of 25 September, under the heading, "A. Improved Liquidity in the Banking Sector", which was the burning issue of the time, you set out the options. One, the preference of an ECB intervention, which it became clear - if it hadn't been clear already - that that was not going to happen, and then under "Potential National Responses", there are five options. Four of them involve a guarantee, either a commitment to provide one or an actual guarantee. The only one not involving a guarantee is the banks setting up a liquidity war chest which, in your comment box, you say "probably not feasible this week".

Mr. Alan Gray

Sure, Deputy. The reason that-----

So if I was reading that, I would interpret it as advocating a guarantee.

Mr. Alan Gray

I understand that, Deputy, if one interpreted that letter in isolation from knowing that earlier that day, we were informed that the main option being considered was a bank guarantee. I was responding to that proposition. And just for the record, I believed that the bank guarantee, which was a horrific and unjust decision on the Irish people, was the best option because of the restricted options that were available by the time we got to the night of the 29th.

Thank you very much. Senator MacSharry.

Thanks very much and thanks very much, Mr. Gray, for being here. Can I ask with regard to your letter of 25 September 2008 to Mr. Cardiff about the strategic options, what information was available to you relating to the liquidity or solvency of the Irish financial institutions prior to providing the advice to the Taoiseach?

Mr. Alan Gray

So I think there was very ... so that was not advice to the Taoiseach, Deputy, that was advice to the Department of Finance and to the Central Bank and to the Financial Regulator in my role as a director of the Central Bank. So, just for clarity, it wasn't advice to the Taoiseach. But in terms of the information that I had access to, I had no access to any information other than what was available to all the members of the regulatory board and all the members of the Central Bank board, which was very detailed information on the solvency position.

And do you believe that the level of management information available to the Central Bank and regulator was sufficiently robust to appropriately inform some of the most significant decisions ever made in the history of the State?

Mr. Alan Gray

I think there was very detailed and robust evidence on the liquidity position but I think the position in relation to the solvency and the need for additional capital was very deficient.

What could have been done better at that time? I mean, you mentioned that liquidity and solvency was purely ... the difference was purely a matter of valuation on a given time. So, what is your view on what ought to have been done better in assessing the solvency at that time?

Mr. Alan Gray

I think that there should have been more forensic investigation of the property development loans and I think there should have been more downside risks in the stress testing that was undertaken.

But given the time available, presumably, was this possible do you feel?

Mr. Alan Gray

No. I mean I ... the committee are probably very aware of the book on the fall of the Celtic tiger by Professor Antoin Murphy who ... I don't know whether he has given witness evidence here but I consider him to be the most insightful economist with expertise in this area. And I agree with assessment really that there has been undue attention on to the guarantee decision, which was probably the best option of the terrible options available but the horrific mistakes were made by many people prior to the guarantee and sometimes very significantly prior to and also post the guarantee.

Yes, okay, just back to Druids Glen briefly. When you were going to the house for the private meeting, were you aware that there was onwards then to Druids Glen for dinner? Was that always part of the plan or?

Mr. Alan Gray

It was not part of a plan involving myself. I was invited for a meeting on the morning-----

Mr. Alan Gray

-----and I understood that the meeting would conclude then, while some of the other parties went to play golf. I had not been invited to dinner previously and I had no intention of going to dinner with the group.

Mr. Alan Gray

Just so I'm clear, and at the end of the meeting, probably because of the level of detail of the notes and analysis that I was presenting, the Taoiseach asked would I be able to meet the group later to continue the discussion over dinner.

Okay, so golf intervened and you continued the discussion afterwards and you went elsewhere. You didn't play golf so you linked back up with them later on. Isn't that correct?

Mr. Alan Gray

I went back to my office to work on other issues and I was not even certain whether I would have been able to go for dinner because I had some other plans but I decided that this issue of unemployment is so important that I'm not going to give up the opportunity to-----

So, you came back after the golf for that and for all the world, the meeting stopped at the house and it resumed at the public forum in the restaurant in Druids Glen.

Mr. Alan Gray

That's the case.

And the golfers could have talked about football, banking or God knows what for the 18 holes or nine holes or six holes or whatever. Would that be fair?

Mr. Alan Gray

I don't think I'm in a position to comment on that.

Absolutely. We don't know in other words. So they didn't say to you, "Well, look we're going to consider this over our golf and we'll talk to you later on." There was none of that.

Mr. Alan Gray

No.

Okay. Do you feel that, considering the credentials of everybody involved, notwithstanding your own view on it and what you've said, that somebody considering the attendees at this event might find it somewhat hard to believe that banking wasn't discussed? Would you think that's outlandish or do you think it's reasonable?

Mr. Alan Gray

I've heard that comment, Deputy, but, certainly, anybody who knows me knows that I would not be discussing banking issues with an individual bank and the Taoiseach present while I was a director of this bank.

Absolutely, and you've been clear on that and we've ... you've given your word on that and so on. But, again, in your experience of life, not least economics, could you appreciate that that's a point of view that somebody could quite reasonably have, looking in?

Mr. Alan Gray

I accept that it's a view that someone may have but I've found in lots of areas of life people seem to have great certainty on what happens, but often the certainty has no relationship with the facts.

Indeed, and then there's the concept of the balance of probability. You'll be familiar with that, I'm sure.

Mr. Alan Gray

I think I would be fairly good on probabilities.

Yes. So just two very final questions, Chairman. And it's back to your time on the Central Bank. Would you've be familiar with Tom O'Connell as chief economist in the Central Bank?

Mr. Alan Gray

I would.

He would have given evidence here that, despite his proximity to the bosses and the board and the 7th floor - indeed, he met personnel, he told us, regularly at the water fountain there - he had extreme difficulty in getting his message across to the board on the basis of what he called the political and property vested interests within that board. Is that your experience of having talked with him, bearing in mind your own view that economists aren't for hiding behind the door in terms of making their views known?

Mr. Alan Gray

I was surprised to hear that evidence and I'm not sure what period he was referring to in the evidence, Deputy, whether it was a period when I was on the board or some period previously. But I never felt there was any restrictions on what people would say at the board and I ... being a non-party political person, I never noticed any politically ... party politically driven views -----

Mr. Alan Gray

Or property.

Okay, and he did say that he regularly ... this is the second part of that question and I have one very final one, Chairman, if its okay. The ... he said he regularly presented to the board. Obviously, he was brought in to give presentations and so on.

Mr. Alan Gray

He did, yes.

Would there be anything to prohibit, for example if he'd have said "Look, while I'm here, I have concerns about such a thing." Would that opportunity have ever been afforded to somebody like him?

Mr. Alan Gray

It certainly would.

Okay. That's good, that answers that. You mentioned how, in part of your dual representation down on the board of the regulator, that you requested a specific private meeting with each of the individuals from each of the sections.

Mr. Alan Gray

Yes.

Again, we had people who claimed to be dissenting voices from those sections that were in here. The evidence will show who they were. Did any of those people highlight to you, "Look", you know, I've had serious concerns here. I don't have enough staff", or ,"Nobody's listening", or, "There's a bubble building", or, "We're not doing anything on the macro-prudential regulatory side, we're ignoring that and focusing just on the consumer side", as some of the evidence seemed to depict? Was this not in private and the benefit that these "surprised people", as you put it-----

Mr. Alan Gray

Yes.

-----were able to share that with you? Did that not ring alarm bells for you or did they just simply not share anything with you?

Mr. Alan Gray

No such views were expressed to me, Deputy. I asked could I meet all of the divisional managers and I said I wanted to meet them one by one. It was suggested that maybe they should meet me with a group or something. I said, "No, I want to meet everyone one by one." And it was asked why did I think this was appropriate and would it not be best to deal with it in the board and I said I felt, as a new board member just coming in in 2007, I wanted to have the opportunity to meet the key people and hear one-to-one. And at no time ... I said to them, and again I said it ... in the context of what I find a slightly frightening public context in this, I might be a bit more formal than I normally am, but I said, "Look, I'm a non-executive director of this. If you have any views that you wish to express to me, give them to me in confidence because I want to understand what are the issues."

And is it fair to say nobody did?

Mr. Alan Gray

And the only issue raised, which was a great surprise to me, was a great concern about the IT systems in the Financial Regulator and difficulties in getting adequate service from the Central Bank.

Thanks very much.

Mr. Alan Gray

Thank you.

Senator Michael D'Arcy.

Thank you, Chairman. Mr. Gray, you're welcome.

Mr. Alan Gray

Thank you, Senator.

Can I ask you, Mr. Gray, following the visit by two senior Anglo Irish execs to your office on the day of the guarantee, you subsequently spoke with An Taoiseach, Brian Cowen, did you tell him during that telephone conversations that both of those executives had attended your office during the day?

Mr. Alan Gray

I did not and I did not refer that to anybody else. I did not give any great import to that. And the Taoiseach was asking my advice in the middle of a crisis situation and I felt if I was to refer to the fact that two executives had come to my office, that it might give an undue prominence or could be misunderstood in some way. And I did not mention it to the Taoiseach or anyone else. And I decided, when the issues of the Druids Glen discussion came public, to make a public announcement on that.

And with the benefit now of hindsight, should you have told the Taoiseach?

Mr. Alan Gray

I don't think so. I regret I'm ... that I maybe should've told the Governor of the Central Bank but I don't ... I think if I refer to that it might be misinterpreted as some way suggesting I was trying to promote their interest.

Okay. In the month of September, were you aware that the Central Bank were ... was pairing institutions or having conversations and some ... with one institution with another?

Mr. Alan Gray

Were they ... sorry, Deputy?

Were they attempting to pair institutions?

Mr. Alan Gray

I was aware of some of those discussions because they were referred to at the Central Bank board. But there was no detailed discussion on them and they were seen very much as an issue that the Department of Finance and the Central Bank were leading.

Mr. Alan Gray

Okay. Mr. Gray, you're an experienced individual as well as an experienced economist. If ... could I ask your view in relation to the ... the bank guarantee? When I say "in relation to the bank guarantee", was there any other likely option to be taken on the night of the bank guarantee itself, considering what's been said to us this morning by PwC, what you've said in relation to the minutes of 25 September and the conversations that were held up to the night of the guarantee? Was there any other likely option to be taken by those in that room on that occasion?

Mr. Alan Gray

I think once it became clear that the ECB were going to do nothing, then the only options were either to guarantee the banks or pump a massive amount of capital into the banks or nationalise the banks.

That was all. Can I now ask the question that I've asked previously? It was known that the Anglo bonds were due on a particular date-----

Yes, okay. Just be careful of prejudgment now, Senator.

I shall be careful, Chairman, as always.

No bother.

Why wasn't something done on the weekend, rather than waiting for the following week to come?

Mr. Alan Gray

Well, my understanding ... so I'd have no detailed knowledge of why something wasn't taken or not but it was very clear at that critical Central Bank emergency board meeting on the 25th that options had been considered, that the advisers were doing further work, that the Central Bank and regulator were being asked to refine and examine the options over that weekend, including ... and NTMA were at that meeting to give advice to the Government early the following week. So in terms of could anything else have been done, I am not privy to that Deputy.

I'm trying not to make a judgment here now, Mr. Gray, but we've been told that if you were taking a bank down, you could only do it at a weekend. And, the weekend came and went.

Mr. Alan Gray

I don't understand why you couldn't take a bank down on a Monday night.

In terms of ... well, that's been the evidence that's been given by Governor Hurley - that if there was something to be done, it would be done at a weekend when you would have more time, more hours, rather than a number of ... a small number of hours during the week.

Mr. Alan Gray

I suppose that depends on the amount of planning that was done in advance and there would be some evidence ... I am not sure whether Northern Rock, when the UK Government initially gave a guarantee and then subsequently nationalised it...whether they did it at a weekend or not, I wouldn't have thought it's impossible not to...but I defer to Governor Honohan's views.

Okay, sure. Did you see former Governor Hurley's evidence where he used the term in relation to some of the powers available to the Central Bank as "theoretical"?

Mr. Alan Gray

I, unfortunately, have not had the opportunity because I've been working extensively in Europe and advising to look at all the evidence of other people, but I'm happy to give any comment on-----

No, if you haven't seen it, you know, I don't see the point. Can I ask, Mr. Gray, you entered the Central Bank in early '07?

Mr. Alan Gray

That's correct.

And the final FSR report was concluded and that final FSR report outlined the substantial increase in household debt. It was, clearly, itemised as an area of substantial concern.

Mr. Alan Gray

Yes.

Why was it allowed go unchecked or was the matter raised at board level? This State went from one of the lowest household debt, 71% of GDP, going back to '97, to a predicted figure of 248% of GNP.

Mr. Alan Gray

Senator, it certainly was raised and I think in my evidence earlier today I pointed out that it was an issue raised by the Central Bank directors, including myself, when we asked for further investigation of that issue.

And finally, Mr. Gray, in September '08, in your witness statement, you state, "In addition to two institutions which were being very closely monitored by the Regulator, one of the other institutions advised that “if markets do not improve they risked breaking liquidity ratios in a matter of weeks.” What actions did the Central Bank Financial Regulator take to support the two institutions?

Mr. Alan Gray

They would've provided not just to those institutions but to other institutions - and they had been doing this for some time - access to ECB funding. But there was...the only other option that they could've taken was emergency liquidity assistance and they had concerns on that.

Were proposals by the Central Bank or the Financial Regulator or the financial institutions of the other financial institutions, were any proposals made to assist those two that were in immediate difficulty?

Mr. Alan Gray

So my understanding from the briefings given to the board that there was discussions with the other banks about whether they would be willing to give support to address what was then seen as a liquidity problem.

Did you personally present any proposals to the Taoiseach to assist either of the two institutions?

Mr. Alan Gray

I did not present any proposals to the Taoiseach to assist those institutions or any proposals to any other parties to assist those two institutions.

Excellent. Thank you very much. We are going to start moving towards wrapping things up. Deputy Phelan.

Thank you, Chairman. Mr. Gray, just returning again to annex 9 of your statement where you said, "No one from Anglo had ever asked me to take action on their behalf or to make representations on their behalf." I want to put a quote to you from a book produced by Bruce Arnold and Jason O'Toole called The End of the Party, page 15, specifically, where it states:

When he was Finance Minister, Cowen appointed Gray as Director of the Central Bank and the Financial Services Authority of Ireland and also as a member of the Irish Financial Services Regulatory Authority (IFSRA)...

In late 2010, Indecon contacted the website forum politics.ie to ask them 'to point out that despite what's being posted here and alluded to, Indecon have never acted for Anglo Irish Bank in any capacity'.

Only days prior to the banks' bailout, Drumm says he and FitzPatrick met with Gray as a 'go-between' between Anglo and the Department of Finance. He says the intervention was needed because Finance 'wouldn't tell us what way they were thinking'.

According to Drumm, calls were made to Alan Gray. He was asked: 'What should be done? What are they thinking? Are we doing the right things? Are we doing the wrong things?' There could be no direct communication with the Department of Finance.' At meetings there attended by Drumm and FitzPatrick, the officials would sit and listen and look. In the end no one was any the wiser. According to Mr. Drumm, 'They wouldn't tell them what to do. They wouldn't help us.'

I'm sure you're probably familiar with that particular quote; it's at variance with your own annex 9 statement that you didn't act on, you know, questions that were raised with you by Anglo. Can you answer it?

Mr. Alan Gray

So, there's absolutely no truth in that statement. My evidence is the factual evidence on the position. I did consider taking legal libel action against the publishers and there was something in a newspaper that I subsequently .... more recently as a leaked version of Mr. Drumm's non-admissible statement was issued-----

Careful. I won't draw into the content of Mr. Drumm's statement as that's still a matter that's under consideration with the DPP.

Mr. Alan Gray

I understand, Chairman, and I won't refer to that but there was a similar allegation to that one in the book by a national newspaper where they actually didn't even state that this individual has alleged this. They stated I'd had made those contacts and representations and had presented proposals to the Taoiseach on this. And I have never sued any newspaper and I believe in open discourse and even though I probably would be a lot wealthier tonight if I did, I chose not to, but that doesn't mean there's any basis for those suggestions.

Final question.

In your witness statement you advise regarding to the guarantee:

I first heard of this as the main option being considered at an Emergency Joint Central Bank meeting on 25 September but it must have been worked on much earlier. The Governor of the Central Bank and the Department of Finance briefed the Board and indicated that a guarantee of the liabilities of banks was being considered.

I have about...there's five parts to the question, brief answers if you can. Did the Governor and-or the Department of Finance advise how a guarantee solution came about?

Mr. Alan Gray

They did. They indicated that they're...through the domestic standing group, there was advisers appointed by the Department of Finance and they had also indicated at that meeting that there had been discussions with the banks.

Okay, so the second part is outside of who was involved ... so outside of the discussions with the banks and the domestic standing group were there others involved in that?

Mr. Alan Gray

Well, I have no knowledge of that...any of those discussions. The first I heard about it was at the Central Bank board and there was no reference to discussions outside of those parties at that meeting.

Okay. Was the extent of the liability of the guarantee discussed or quantified?

Mr. Alan Gray

So, they certainly quantified the amount of loans that are liabilities in the banks. I think it...just...I don't have as much energy as members of the committee but it was either €600 billion or €400 billion was quoted in the statement and that was the only assessment that was shared with the Central Bank.

Okay. Are you aware if discussions had already taken place either formally or informally with the ECB or other institutions about the suitability of a guarantee?

Mr. Alan Gray

I understood from being on the board of the Central Bank that there had been extensive discussions with the ECB in the run-up to the guarantee position because once Lehman Brothers went bust and was allowed, very foolishly in my view, to be liquidated, it meant that interbank funding ended and a world financial crisis happened in 14 or 16 countries subsequently. And the ECB was very much aware of this. There was very regular contact by the Governor, which was reported back in a general sense to the board and I understood as it got near the date, maybe even daily telephone discussions.

But exactly what was discussed, or not, I'm not quite sure.

Briefly, then, what other strategic options were discussed at the meeting?

Mr. Alan Gray

So the only other strategic option - which is in the board minutes that I shared but is under section 33AK - was to provide a bond to ... a State bond to provide credit to the banks, which would've been effectively a guarantee. When there was a discussion on that, they indicated that that would have a particular risk for Ireland's credit rating, and I did not get the impression that it was being seriously considered.

Thank you very much. Senator Barrett.

Thank you, Chairman, and thanks again to Mr. Gray. Did the Central Bank have rules for board members in relation to contacts with the sector you were regulating?

Mr. Alan Gray

So they did, Senator, have a code of conduct but it didn't have any restriction on meeting or interacting with ... with others.

Mr. Begg, when he was here, said there was no training at all for board members. Was that true in your time?

Mr. Alan Gray

I believe that if any board members had've asked for training, it would have been provided. Prior to joining the board, at my own expense I took training in the Chartered Institute of Accountants about the roles and responsibility of directors because I was aware of the significance of the issues that the Central Bank would be dealing with.

And you told us earlier that Bank of Ireland was the only banking client?

Mr. Alan Gray

That's correct.

Okay. And the Department of Finance and the Taoiseach's Department, were they clients of yours?

Mr. Alan Gray

So in relation to the Department of Finance and the Taoiseach's Department, Indecon, as you know, which is the research practice I lead, is one of the largest groups of research economists in Ireland. Similar to the ESRI, we would tender for projects. We've never been awarded projects except by public tender from those organisations. My understanding is, and I haven't checked all the detailed records but, from memory, Senator, I don't think we did any work at all for the Department of Finance or for the Taoiseach's Department when I was on the board of the Central Bank.

So you didn't have a conflict of interest?

Mr. Alan Gray

No, definitely not.

Just the last one then. When Mr. FitzPatrick and Mr. Drumm came to see you, were they trying to get you to assist in the sale of Anglo?

Mr. Alan Gray

They were not.

Okay. Thank you very much.

Mr. Alan Gray

Thank you, Senator.

Thank you very much and I'm just going to wrap up very briefly. In your witness statement, you advise that the guarantee was not thought on the night of the ... or, sorry, the guarantee was not thought up on the night of 29 September but arose from extensive analysis by the Department of Finance, Central Bank Governor, regulator and with the other involvement of teams of external advisers. By, kind of, implication or by just, kind of, the outline of that, it could appear that your comments on the guarantee would seem to imply a predetermined guarantee scenario was already evolving or developing or had developed. Would that have been the case, yes?

Mr. Alan Gray

So, Chairman, just ... I want to be very careful on the language here.

Mr. Alan Gray

In terms of predetermined, if you mean a decision had already been taken, I don't think that would be an accurate reflection.

Mr. Alan Gray

But was it presented back on the Thursday, at 25 September, as, really, the main option being considered, the answer is definitely "Yes".

In terms of probability, to use that term, this was probable or not more than other things on the table?

Mr. Alan Gray

I think it was dependent on a few issues, Chairman. One is whether liquidity markets would improve or deteriorate-----

Mr. Alan Gray

-----and, secondly, whether there would be any ECB-wide initiative. And in my note on that date, I did point out that what we had to be very careful of is that the ECB does not leave us on our own and then subsequently put in policy initiatives which could have benefited Ireland, and I believe that is actually what happened.

And you covered that earlier this evening with us as well.

Mr. Alan Gray

Yes.

You say that a liquidation of Anglo would've been much better for the Exchequer but much worse for the economy. In what way would the Irish economy have suffered from this and can you put any figure on it?

Mr. Alan Gray

If there was a liquidity ... if Anglo Irish Bank was liquidated, I believe that there would've been a bank run in Ireland and I think the economic consequences would've been catastrophe.

Mr. Alan Gray

And we have examples of this, Chairman. If you look at what happened in Argentina, when there was the bank run, or in a number of other countries.

And, finally, I just want to come back to the call that Mr. Cowen, the Taoiseach, made to you that evening. He rings you - what's the content of that telephone call actually?

Mr. Alan Gray

The content of the telephone call?

Yes, what was the purpose? Mr. Cowen, obviously, has a reason for ringing you.

Mr. Alan Gray

Sure.

He wants to discuss .... what's he ringing you about?

Mr. Alan Gray

So, he was ringing me as an independent director of the Central Bank and one which ... the documentary evidence you will have seen, Chairman, shows that I have very independent views and am not-----

Mr. Alan Gray

No, but I just want to ... and he was in the process of trying to make a decision on this. The Central Bank board, of which I was a member, were told that the Government would be seeking their advice. And he rang me to indicate that the Government were considering ... he didn't say that they were going to do it, he said they were going to consider providing a bank guarantee and did I have any views on it and what did I think would be the market reaction.

Okay. So, as you said earlier, the guarantee was in the ether in terms of probabilities or whatever. We'll see what the weight of that actually is but we know, or it has been presented here from testimony, that the issue of including or not including Anglo in the guarantee is a very significant discussion on the night. The Minister for Finance and the Taoiseach have different views on it and, in fact, the room seems to be split very much on this. And the issue of nationalising or not nationalising Anglo is, by the testimony so far, whether it was the biggest issue or not on the night, was certainly ... certainly a live issue inside in the room. Did the Taoiseach at any time discuss either the inclusion of Anglo in the guarantee or not or the nationalisation of Anglo or not?

Mr. Alan Gray

He did not and it was not raised at the board meeting on the previous Thursday. So some ... for some reason, something happened between that Thursday and the Monday. And if he had've asked my view, I would've been willing to give it, and my view-----

And what would it have been?

Mr. Alan Gray

My view would've been that it would be a mistake unless we had undertaken the due diligence. Because it is a really important issue, Chairman, that I have seen in so many cases - the private sector comes to the state with a failed institution and wants them to nationalise it, and the cost is always with the taxpayer and-----

And earlier that afternoon, the CEO and chief executive ... sorry, the chairperson and chief executive officer had called to you, told you about all their problems.

Mr. Alan Gray

Yes.

You were cognisant of that. The Taoiseach's on the phone to you. There is a guarantee being put in place ... the extension of the guarantee. By your own volition, do you think you maybe should have had that discussion and told the Taoiseach that there ... you had a visit from these gentlemen that afternoon and, on the information that you had, this is the exposure the State would actually be taking?

Mr. Alan Gray

Chairman, just to be clear, I never said I felt, even in retrospect, I should have told the Taoiseach. I felt then and I feel now it would've been a mistake to mention that to the Taoiseach because it could've been misinterpreted as suggesting that I had some, you know, issue and the Taoiseach might have asked me about what Anglo were talking about, and it wasn't relevant to what I was being asked by the Taoiseach.

Okay. I'm going to wrap things up, Mr. Gray. I certainly appreciate, and the committee does, your co-operation this afternoon. We've, kind of, a long schedule today and we've a bit of an overrun. Is there anything you'd like to say? I know in your opening statement you gave some recommendations for the future, which the committee would always welcome to hear in terms of our report. Is there anything other than that that you'd like to further add this afternoon?

Mr. Alan Gray

No, Chairman, just to thank members for their impartiality and their courtesy.

I was going to say, Chairman, when you were asking me that question, that I hope the committee will consider some of the gaps that currently exist, which are ... need to be addressed to potentially prevent another crisis. And I haven't had an opportunity at this session to outline the details of what I think would ... are those gaps in detail, other than the short ideas I have outlined. And if the committee would find it useful to have some subsequent written views from me on those, I would be willing to do that.

Okay, by means of correspondence, that's always welcome. In terms of ideas, we never have enough ideas, as we know, without a formal legal process and all the rest of it, Mr. Gray, so thank you very much for that offer. With that said, I now propose that in thanking Mr. Gray for his participation and engagement with the inquiry, that we formally excuse him and doing so, that we will suspend until 7:15 p.m. Is that agreed? Agreed.

Mr. Alan Gray

Thank you very much.

Sitting suspended at 6.51 p.m. and resumed at 7.25 p.m.
Additional debate to follow shortly.

Anglo Irish Bank - Mr. Tom Browne

The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? Our final hearing of this evening is with Mr. Tom Browne, former director of Anglo Irish Bank. Mr. Browne was a director of Anglo from 2004 to November 2007. He joined Anglo in 1990 and was a member of the Dublin lending division from 1990 to 2000. He retired from Anglo in November 2007 and stepped down from the board at the same time. Mr. Browne, you are very welcome before the committee this evening and thank you for your co-operation in being here.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of this inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So, with that said, if I can now ask the clerk to administer the oath to Mr. Browne, please.

The following witness was sworn in by the Clerk to the Committee:
Mr. Tom Browne, former director, Anglo Irish Bank.

Okay. So, welcome again, Mr. Browne and if I can invite you to make your opening remarks to the committee, please.

Mr. Tom Browne

Thank you, Chairman. Good evening, ladies and gentlemen. I have been a career banker, starting with AIB in 1979 where I worked in various branch banking and head office departments. In 1990, I joined Anglo Irish Bank as lending manager in its Dublin branch. I was promoted to divisional head in 1997. In November 2000, I resigned from the bank to join the Devey Group as chief executive. The Devey Group was a Dublin-based health care, hospitality and property group with business operations in Ireland and Portugal. After approximately 11 months with the Devey Group, I was approached by the Anglo CEO, Seán FitzPatrick to rejoin the bank. I returned to the bank in February 2002 to establish a new division in the bank called the wealth management division. The wealth management division was an amalgam of various private banking operations in Dublin, London, Vienna, Geneva and the Isle of Man. In January 2004, I was appointed as an executive director to the board of the bank. In January 2005, I was appointed head of lending Ireland as part of significant management changes introduced by the newly appointed CEO, David Drumm. In April 2007, I advised Mr. Drumm and the chairman, Mr. FitzPatrick, of my intention to leave the bank with the announcement of my departure being made to the Stock Exchange on 4 September 2007 and set up a new business LeBruin, which is a corporate finance and debt advisory business now employing 20 people in Dublin, Galway and London. I welcome the opportunity to be of assistance to the inquiry.

Given that I left the bank at this time, I can only be of limited assistance on what happened in the last quarter of 2007 and through 2008 when the bank experienced growing pressures and issues, which culminated in the Government guarantee and, ultimately, the nationalisation and State bailout of the bank.

The inquiry has provided me with core documents. I have, however, not had any insight into the workings of the bank itself since I left in 2007. I will, again, however, do my best to be of assistance to you.

When I left the bank in 2007, I firmly believed that the credit approval process, the loan review process, the ongoing reviews of credit policies and the developing risk function within the bank were sufficiently robust to provide early indications of problems in the loan book to the executive team, the board and to the Financial Regulator. Over the ten years to 2005, Anglo Irish Bank had transformed from being a small player in the Irish marketplace to becoming a serious player in terms of market share in chosen segments in Ireland, with a growing business in the UK and an emerging business in the US. This performance in Ireland was driven by a number of factors: a very active, long-standing client base, many of whom had become the leading players in the property development and investment sectors; very strong customer loyalty across the core client base, which ensured a high level of repeat business for the bank; and an economic environment with low interest rates and wholesale bank funding at unprecedented levels. The success of Anglo over the ten-year period to 2005 was reflected not just in the growth of the loan book, but also in year-on-year increases in earnings and a strong market rating recognised by reputable international agencies such as Oliver Wyman who, in 2007, named the bank as the best performing bank in the world over the previous five years.

Due to this comparative success and to the prevailing economic conditions, competition in the mid-2000's began to significantly intensify. This competition came from existing universal banks in Ireland and from emerging foreign lenders in the market. For example, AIB bank established what they called win-back teams to target former clients who'd moved their business elsewhere, or existing clients who were multi-banked. Emerging players, such as Bank of Scotland Ireland, ACC Bank and Ulster Bank, all competed very aggressively to wrest market share from existing banks, including Anglo. All of this led to an avalanche of credit in the marketplace. The timing of the Savills launch could not have been worse. Asset values rocketed, signs were emerging of a property bubble and, while the general consensus was that the market would have a soft landing, the emerging evidence indicated a serious potential problem.

In early 2006, the Anglo board decided, on the basis of management advice, to change its lending policy reflecting the concerns we held about the acceleration in asset values and given the growing intensity of competition. A decision was taken that no new clients with development funding proposals would be entertained. The bank would exclusively deal with existing customers with a deal carrying an acceptable level of risk. This policy change became widely known in the marketplace and, indeed, some competitors played on this in their tactics to attract new development business. This policy change was Anglo's attempt to curtail activity in this sector of the market, which, clearly, had begun to overheat. On reflection, the motivation for this policy change was entirely correct; however, the policy itself was seriously flawed because it did not go far enough. We continued to support our bigger existing clients who continued to be active in the market, which led to very large exposures to a concentrated number of clients. The lending proposals at that time all met the acceptable levels of risk. These proposals were from long-term, proven operators, each with a depth of expertise and capability to deliver successful projects time and again.

Yet, with the benefit of hindsight, the failure to more forcibly implement the policy decision taken in early 2006 together with the shortcomings in the policy itself was a serious mistake. The consequences of this mistake became very clear when the property market in Ireland collapsed, resulting in very significant losses for the bank. The bank should not have defended its position with its biggest borrowers against the intensive competition in the market to the extent that it did. This defence led to unacceptable exposures concentrated on a relatively small number of customers, and no matter how professional and capable these customers were, the concentrated risk profile which resulted from this defence was to put the bank's loan book at an unacceptable risk.

Regarding the funding of the bank during this period, I did not experience that funding was under pressure prior to my departure from the bank. Through the early part of 2007, wholesale corporate and retail funding had held up well and the performance of the bank in attracting new funding was very good. There was no indication of stress. However, the pressure which emerged ultimately, post the Northern Rock issue, demonstrated that the funding base was not sufficiently wide, deep or stable to underpin the scale of the loan book. It also since emerged that at the time of my departure from the bank, Seán Quinn had a sizeable position in the bank through CFDs, contracts for difference. I was not made aware of this, although other board directors of the bank were. Although Seán Quinn's CFD position would go on to cause difficulties for the bank, it would not, however, be appropriate for me to make any further comment on this matter because of ongoing legal proceedings.

When I left Anglo, I genuinely believed that the bank was solvent and liquid. Indeed, a thought that a liquidity or solvency issue would emerge was alien to me. I did not see a threat to the long-term viability of the bank as I left the bank in 2007. I was a senior executive and an executive director of Anglo until 2007. Given what ultimately happened and the consequent impact on so many people, staff, customers, shareholders and the State, I deeply regret my own role in the building of the loan book to what became an unsustainable, overly concentrated scale. Thank you.

Thank you very much, Mr. Browne, for your opening remarks.

Could we have clarification as to when Mr. Browne, exactly, left the bank?

Mr. Tom Browne

My announcement was on 4 September 2007 to the Stock Exchange, and I physically departed out of the bank, probably, over the following four to five weeks.

Thank you. Deputy Murphy.

Thank you, Chairman, and thank you, Mr. Browne. You're very welcome.

Mr. Tom Browne

Thank you.

I'd like to begin with the performance of the board, if I may. There was a board review undertaken by external consultants in 2003 and this review noted that some directors felt that the board pack "fails to ignite debate on important issues". The report also notes that many directors expressed a "frustrating need for more debate on strategic issues". When we come to the Nyberg report in 2011, when speaking about Anglo, it says, "There is little evidence that board directors at the time were active in challenging the bank's approach or its pace of lending growth". And, again, many of these observations were also reflected in a board evaluation that was carried out in November-December 2007. Do you agree, or not, with these observations?

Mr. Tom Browne

Again, the first report, obviously, would have been carried out before I became a board member. I didn't become a board member until early 2004.

But, would that have been your impression of the board when you arrived?

Mr. Tom Browne

No, it wouldn't have been.

"Fails to ignite debate on important issues ...many directors expressed a frustrating need for more debate on strategic issues."

Mr. Tom Browne

I would have always seen the board as a very open, transparent gathering. I never felt, over the couple of years that I was there, that there was any fear of any of the non-executive directors asking any hard questions in regard to any matter pertaining to the business of the bank.

But, do you think that the level of debate and challenge to management of the board was sufficient then from the non-executive directors?

Mr. Tom Browne

Again, you know, as I said, the atmosphere of the board is very much an open, transparent process, and I never felt that any of the non-executive directors were afraid to actually, kind of, ask any far-reaching questions in regard to any aspect of business.

So, when you came onto the board, though, was there any reference made back to this external consultants review from 2003 on the strategic management committee, was any discussion of how you might improve the board packs, improve debate at the board level?

Mr. Tom Browne

Well, the board packs were being improved the whole time in terms of the level of information that was being given, so there was continuously upgrading of all the information on an ongoing basis from various aspects of the business. And, again, going back to my point, I never felt there was anything but a very transparent, open environment in terms of discussion around any issue relating to the activities of the bank during my period on the board.

Okay. When Mike Aynsley was before us, he said that the committee structures was not as effective as they could have been, and he was aware that a board within a board existed. Can you comment on this in a general way, please?

Mr. Tom Browne

Can you just clarify ... what do you mean by that?

Mike Aynsley talked about this idea of a board within a board existing at Anglo.

Mr. Tom Browne

Again, you know, during my period of time on the board, I never got a sense that there was anything but a very transparent, open process around the board table, and I wouldn't have got a feel ... I wouldn't have got a sense that there was a, kind of, a board within a board during my period of time there.

Okay. The Nyberg report also talked about Anglo having insufficient checks and balances - "Traditional risk evaluation procedures and risk mitigants were not implemented in practice", and that governance also "fell short of best practice". What do you say to that? Do you agree with that?

Mr. Tom Browne

Again, if you go back to the risk function in terms of how the risk function evolved over the years as the bank grew, I would have felt the risk function was very much on top of its game in terms of actually, kind of, being on top of the loan book.

The bank was growing, you know, in three jurisdictions - Ireland, the UK and in America - and the risk function was staffed up by high-quality people, from within and new hires from other banks, so I would ... Deputy, I would have always felt that the risk function, in particular, was ... you know, it ... it was growing in tandem with the bank. You know, the management structure they put in in regard to watch lists where the ... you know, every manager had his watch-list case, which was actively managed by the managers ... I would have always felt the risk function was very much on top of their game in terms of management of the overriding risk in the bank.

So is Nyberg incorrect when he says that governance fell short of best practice in Anglo Irish Bank?

Mr. Tom Browne

You know, again, I'd ask the question, "What does that actually ... you know, what does he mean there?" You know, in what context is he saying the governance ... you know.

Have you read the Nyberg report?

Mr. Tom Browne

I haven't read the Nyberg report.

Okay. Would you have a ... okay, if you haven't read it, I'll move on from that. If you could, just briefly describe to me the corporate culture of the bank during your period on the board.

Mr. Tom Browne

The corporate culture of the bank was very much ... you know, it was a very inclusive bank. It was a, you know, ... it was a very from the, kind of, top-down in terms of, the bank was very much on the one-way street in terms of what it was doing. It was very focused in terms of what it actually ... it did. You know, the board was very aware of, actually, kind of ... the actual ... the issues around the ongoing activities of the bank, no matter what area of the bank, and any ... and there was always encouragement to actually ... to flag any issue of concern to the board early, and that was very much the mindset, you know, within ... across the board table, that if there was a concern, if there was an issue, bring it up earlier and make the board aware of it.

How often would the board have social occasions, a dinner, for example, where it would bring in someone from outside of the bank to engage with them, maybe make presentations in an informal way? We have heard here before about a dinner at Heritage House, at which the former Taoiseach attended. Those kinds of engagements ... were you party to any of those types of dinners with the bank engaging with people from outside of the bank?

Mr. Tom Browne

Yes, like, you know, there would have been one or two occasions every year. Somebody from, you know, the industry expert or, you know, from financial markets would have been brought to a, you know, a luncheon or a dinner after a board meeting and would have given their view in terms of the relevant topic of expertise. So that was kind of ... that was something that happened on a regular enough basis.

The purpose of those occasions was to hear from the outside experts-----

Mr. Tom Browne

Yes, exactly.

-----to speak to the board.

Mr. Tom Browne

Yes, exactly, to give their view in terms of, you know, whether it was the property market or whether it was the financial markets, you know, in terms of actually giving their view of, kind of, of something that the bank felt was a relevant topic.

Were you ever at a dinner or a luncheon where a politician attended?

Mr. Tom Browne

No, I don't remember. Yes, I don't because, again, that one you referred to happened after I left the bank.

Mr. Tom Browne

You know, we ... for example, there was ... you know, there was, I think, a couple of lunches where the Financial Regulator attended it. You know, I remember that one, okay. That was back in 2006, maybe.

Was that a lunch or a dinner, do you remember?

Mr. Tom Browne

I think it was a lunch, Deputy.

And the purpose would have been to hear from the Financial Regulator about-----

Mr. Tom Browne

Yes, exactly, how ... you know, because what was, kind a, going on in terms of actually the whole regulatory environment around Europe and locally in terms of the impact it was going to have.

Mr. Tom Browne

I think that was ... I think, John Hurley was the man-----

Mr. Tom Browne

-----at the time.

Okay. Moving on from that to your role as managing director for lending, Ireland, can you tell me a bit about the lending culture under your stewardship because Mike Aynsley also told the committee about a story that was related to him about an auction as a way of illustrating the culture and the lending practices in the bank prior to the crisis? This is what Mike Aynsley said to us, and he is talking about someone speaking to him about an auction:

And [the person] said, "I don't know how they found out about it but I was at an auction one morning and a fellow came up and he handed me an envelope, and it was an Anglo Irish Bank envelope, and I opened it up, and there was a cheque inside, which represented slightly more than what the deposit would be and it says ... a note attached saying, 'Just in case you need the deposit'.". So, you know, this is the mindset at the time. It was to go out there at all costs ...

Do you recognise that?

Mr. Tom Browne

I would absolutely refute that story. That would never have happened, in my view. I'll give you another example of an auction that I attended. In early 2006, when the bank had brought its new policy in place, I attended an auction on a property, which was guiding somewhere in the region of €10 million, in terms of its guide price, and it sold for something in excess of €30-odd million at the time, and I remember coming back to the office and requesting my secretary to get all the lenders into the room because this was, kind a, further justification of the change of policy that we had just introduced, that the market had gone out of control. You know, people were way ... were paying way over the odds based on indicative pricing for assets, and that's the other side of the story where the bank was at in early 2006.

Okay, well, let's look at this change in policy. In the core booklets, in Vol. 1, page 121, is a map of Ireland. It's from a presentation from lending Ireland of 30 April 2007. You've seen this report in the booklets.

Mr. Tom Browne

Yes, yes.

Yes, so that would have been compiled and put together while you were-----

Mr. Tom Browne

Yes, it was done in April 2007, yes.

So you were involved in that.

Mr. Tom Browne

Yes, that would have been ... that would have been ... that would have been of the new information that would have been developed over the couple of years.

There's a map here on page 121 and it is, "Total Drawn Land Balances - €5.29bn Loans by Location as at 30/04/07", and it is up on the monitor there in front of you - €2.7 billion in Dublin, a third of a billion in Meath, a quarter of a billion in Galway, a half a billion in Cork, and it is showing, for each county, the exposures. So was this map presented as a positive to the bank, to the board, to the directors? What was the purpose of this?

Mr. Tom Browne

The purpose of this was to actually show the ... exactly where the exposures were in terms of land balance. Land was always, you know, the key issue of concern in terms of actually ... because if there was any correction in the market, your land values were the ones that were immediately going to be dramatically affected.

Mr. Tom Browne

And there was three elements in terms of ... you know, you had your unzoned land, your zoned land and land with planning permission. Your real risk category was your unzoned land because, you know, that was the one that, kind of, if markets had continued to actually ... had deteriorated, the value in regard to that type of land would eliminate overnight. So this, the purpose of this presentation, was to show the exposure, kind of, on a geographical basis.

So what was the point or what was the goal of lending Ireland at this point in time in relation to these figures? To reduce them, to increase them, to-----

Mr. Tom Browne

No, no. The goal was, again, based on the new lending policy that was introduced in 2006, which was very much to curtail the activity in this regard. As I said in my opening statement, we could see from early 2006 that the market was getting seriously overheated.

But if you changed the policy in 2006, why did ... and, again, your internal report shows this, that development lending in Ireland accounted for 30.5% of total lending and that it increased by 50% in the previous 12 months. This is in the report of April '07. If the policy changed in '06, how could lending in Ireland increase by 50% in the following 12 months?

Mr. Tom Browne

As ... again, as I said in my opening statement, is that we continued to support some of our bigger clients who were still remaining very active and that was the mistake that we made, that we continue to support a lot of these bigger clients in terms of the projects that they brought to the bank, and I think that was the mistake, looking back, that we made.

But 50% is ... I mean, if you recognised something in 2006 and the policy is to try and pull back - I understand the caveat that you put in there - but then to see it still increase by 50% in a 12-month period.

Mr. Tom Browne

Well, I think it is a reflection of the fact where asset values were going. You know, again, going back to my point about, you know, we had a very active, you know, client base, they were the biggest players in the market and, unfortunately, we continued to actually support those players when we should have actually probably curtailed the level of lending to the bigger players in the market.

So that was a mistake.

Mr. Tom Browne

Absolutely.

Okay. And just then to note that from September 2004 to September 2007 Irish lending grew by 284% - so that's €13 billion to almost €38 billion - and this was on loans advanced ... It was on loans advanced during this period that Anglo took its heaviest losses and you were MD of lending for most of this period, so what do you say to that?

Mr. Tom Browne

Again, going back to the ... you know, again, the franchise ... you know, the franchise over those number of years was growing in terms of what ... it just wasn't property lending. We'd attempted to, kind of, broaden the base in terms of cashflow lending, M and A-type lending, corporate ... more corporate lending. So we'd broadened the base over those number of years. Again, going back to the point I made earlier on, we had a very active client base. We had a very high level of repeat business.

Sorry, how did you broaden the base? Excuse me.

Mr. Tom Browne

How did we broaden?

Mr. Tom Browne

We were trying to move away from just being purely, you know, dominated by actually property lending.

We were trying to move into other areas of activity in terms of------

What kind ... what areas?

Mr. Tom Browne

Cashflow lending.

Mr. Tom Browne

You know, mergers and acquisitions-----

Mr. Tom Browne

-----management buy-ins, management buyouts. So we were trying to actually, kind of, reduce the over-reliance on property lending.

And what was your view of 100% lending?

Mr. Tom Browne

Sorry?

What was your view of 100% lending within the bank?

Mr. Tom Browne

Well-----

Could you intervene in a process, in a lending process, to make sure that a developer, a borrower, would get 100% financing?

Mr. Tom Browne

No, because, you know, that ... you know, that was, you know, the high-risk area, if you were giving 100% lending on development-type stuff you were ... you know, that was huge risk you were taking at ... you know, at that time, you know.

So you're familiar with the Applewood development in Swords?

Mr. Tom Browne

Applewood in Swords?

Mr. Tom Browne

Yes.

Were you involved in securing that loan?

Mr. Tom Browne

That loan was being done back in the ... probably sometime in-----

Just speak in the general if you can there, Deputy, now, okay.

Mr. Tom Browne

Sorry?

I'm just-----

Just ... sorry-----

Just to be general.

Mr. Browne.

Mr. Tom Browne

Sorry, yes, I was aware of that project, yes.

Okay. And just in terms of the finance for that project or finance for projects at the time, in terms of 100% lending being done by the banks in terms of providing all of the money that was needed to secure the site, was that a practice in the bank?

Mr. Tom Browne

No, it was a unique situation. That would have been a very much one-off situation.

A one-off situation?

Mr. Tom Browne

Yes.

Okay. And you were involved with that.

Mr. Tom Browne

Yes.

Okay. So how can such a situation arise in the bank with such strict lending policies as you outlined in your written statement?

Mr. Tom Browne

Again, I think, if my memory serves, my ... that project would have been done ... that project could have been started probably ... would that have been back in the '90s?

I'm not sure about the start of the project.

Mr. Tom Browne

Yes, I think it could have been, you know. But, again, I think it was a very unique situation where the bank decided to actually ... because of the actual promoter that was involved there, we decided, you know, to take that position and get involved in that scheme at that time, but it was a very much a one-off type situation.

And that decision was made by the board of the bank?

Mr. Tom Browne

By the credit committee of the bank.

By the credit committee, not by the board?

Mr. Tom Browne

Yes. No, it ... it would have been signed off by a non-executive director-----

Mr. Tom Browne

-----under a noting policy.

Okay. And what about the use of personal guarantees in the bank?

Mr. Tom Browne

Again, the bank, kind of, always, you know, looked for personal guarantees. It was the one key ... one of the key tenets in terms of the way the bank did its business - always looked for personal guarantees from its borrowers.

Mr. Tom Browne

And in many cases, you know, people weren't prepared to give personal guarantees, and we weren't prepared to do the loan.

Okay. But there was an internal inspection report ... or, sorry, an inspection report done by the Financial Regulator in 2007 and one of the issues it highlighted was that the bank didn't have a mechanism for formally monitoring the overall extent of the loan book subject to personal guarantees. Why didn't it?

Mr. Tom Browne

Well, every loan would have been subject to personal guarantee?

Okay. Every loan would have been-----

Mr. Tom Browne

Yes-----

-----subject to personal guarantee?

Mr. Tom Browne

-----because it was either ... it was either borrowed on a personal basis-----

Mr. Tom Browne

-----or if there was a company situation, a personal guarantee would have been sought.

I see. So you didn't need to have a mechanism because it applied to every single loan.

Mr. Tom Browne

No, because it applied ... it was ... and it was one of the key standards that Anglo was recognised for, that they always looked for personal guarantees.

Was that a mistake?

Mr. Tom Browne

No, because the logic behind it was, is that the reason why you were looking for personal guarantees, that if you got into a difficulty with the client, right, you had leverage over the client in terms of the personal guarantee.

I'll give you another five minutes but I just want to pick up on this point, Mr. Browne. There were propositions that people who gave personal guarantees gave personal guarantees to many financial institutions and when NAMA was auditing its loan book, when it took it on board, that was certainly something that was visible in the NAMA. So, while you were taking personal guarantees, were you also examining to see if the person who was giving you a personal guarantee hadn't already given a personal guarantee to another institution?

Mr. Tom Browne

Yes. And one of the key things we would have done with our bigger clients in the latter years would have been we would have looked for, kind of, full transparency in their total bank obligations.

And did you discover or uncover situations where a personal guarantee was already in place with another institution and you did not issue a loan?

Mr. Tom Browne

I can't remember that, Chairman, happening. Again, you would have been with, you know, with our bigger clients, the top ten, top 20. We would have, you know, in the latter years been looking at, kind of, their total banking obligations across all their banks.

Mr. Tom Browne

And we ... you know, in terms of actually ... it was a standard ... it was very much standard ... par for the course that we would look for personal guarantees.

Okay. Would you say that the examination of the exposure in personal guarantees in regard to cross-guaranteeing at a personal level was robust enough given where NAMA found themselves when they went and looked at the loan books?

Mr. Tom Browne

Again, going back to my time there ... you know, to picture a moment in time in terms of where, you know, people's, kind of ... you know, the value of the personal guarantees, you know, back in 2005, 2006, 2007, you know, was significantly, you know, I suppose, greater than their debt obligations.

Mr. Tom Browne

Given where the balance ... their balance sheets would have at that moment in time, Chairman-----

Okay, that's not the question I asked you, Mr. Browne. The question is: given what came out in the wash when the loans were transferred into NAMA, and the level of exposure on cross-exposure on personal guarantees, do you think that the ... that the risk analysis of personal guarantees was sufficient enough in Anglo?

Mr. Tom Browne

I think, again, it goes back to the case-by-case basis.

I'm not ... look, we know the paperwork transferred-----

Mr. Tom Browne

Yes.

-----we know what the details of that show. Do you believe, given what NAMA then uncovered when they started looking at each of the books and the personal guarantees that were actually given, that Anglo's risk analysis of personal guarantees ... you say it was a ... it was one of your performing criteria, but when it was washed out and what was seen, was it ... do you now consider it to be robust enough or not?

Mr. Tom Browne

Again, going back to my time there, Chairman, I would have thought, you know, we were looking at the ... you know, the cases on a case-by-case basis. We would have satisfied ourselves in regard to our position in regard to the loan and the personal guarantee.

Okay. I don't want to be repeating myself, Mr. Browne, but that's not the question I'm asking you. I'm asking you now ... we know what happened afterwards. Do you consider it now ... you're going back to then-----

Mr. Tom Browne

Yes.

-----and that you think that everything was fine then-----

Mr. Tom Browne

Yes.

-----and maybe it's fine now even in that regard. That's what was the ... the visible to you then. Given what's visible to you now, do you consider that the risk analysis of personal guarantees was robust enough?

Mr. Tom Browne

Well, given what happened subsequent to that time, Chairman, you know, it would be clear to say that it wasn't robust enough, you know.

Okay. Thank you. Deputy Murphy.

Thanks, Chair. Mr. Browne, looking then ... continuing on this theme, and enforcement of security, NAMA reported that a downward adjustment of €477 million in aggregate was required to the value of the loans acquired from the participating institutions due to the difficulties with enforcement of security, and Anglo accounted for 57% of this total, €273 million. So can you explain why the discount applying to Anglo's loans in respect of difficulties with security was so high?

Mr. Tom Browne

Again, you know, the process was that we would have engaged a solicitor, a firm of solicitors to put our security in place. That was always farmed out. We had a panel of ... two panels of solicitors, depending on the size of the deal. And a solicitor would be responsible for putting the security in place. So, you know, when you ... you know ... so on a case-by-case basis, there was individual legal firms appointed to make sure that the security was perfected. And it was the responsibility of the lending team and the banking administration team to ensure that the security was put in place. But, ultimately, the responsibility was actually ... was the role of the legal agent appointed by the bank in terms of perfection of security. And, again, you know, I don't ... it seems ... that when you say that figure, it seemed extraordinary high. You know, again it depends on, kind of, the individual aspects of each case. But it seems remarkably high to me, because again the process was very much, you farmed out your legal perfection work to an appointed panel of solicitors.

Okay. So you don't think this is indicative of a lax approach to taking security-----

Mr. Tom Browne

No, because, again-----

Mr. Tom Browne

-----because the primary responsibility in regard to the taking of security was with the actual legal firm that was appointed-----

Mr. Tom Browne

-----to perfect it on behalf of the bank. So in that case then, you know, in ... based on your figures, there's a huge issue in regard to the quality of the work that was undertaken by those legal firms. So, you know, it was very much part and parcel of the actual process that the security was perfected by an appointed law firm acting on behalf of the bank. So that work then was, obviously, not done correctly by the individual law firm. And there should be, you know, there should be a ... you know, initial questions asked of those law firms in terms of why didn't they do their job properly.

Okay. And just-----

Thank you very much. Finally.

Final question, sorry. And it's just in relation to discussions at the board in relation to why the NTMA wasn't placing deposits with the bank. What was your view ... I mean, we have a view from Brendan McDonagh from the NTMA that they were always sceptical about the business model of Anglo and that the bank couldn't get deposits from the NTMA. And then, eventually, it did and the NTMA didn't want to keep those deposits with the bank but it had to because of a direction from the Department of Finance. So did the board discuss this and what was the view of the board?

Mr. Tom Browne

I don't remember it ever being discussed at the board while I was there. My answer to that would be, you know, over the years that I was there the bank had a tremendous track record in terms of its ... its actual liquidity and fundraising. It always used to amaze me when you looked at the list of corporate depositors, you know, you had international firms across Europe, you know, with €700 million, €800 million, €900 million on deposit. So the bank was very successful in terms of growing its deposit base under a number of strands over many many years but that issue, you know, in terms of the NTMA, I don't remember it ever being coming up at the board meeting.

Or outside of the board in your role as MD of lending Ireland.

Mr. Tom Browne

Well, I wouldn't ... it wouldn't have been an aspect of-----

On the strategic management committee?

Mr. Tom Browne

It wouldn't have been an aspect that I would've been looking at.

Okay, thank you. Thank you, Chair.

Thank you very much. Deputy Doherty.

Can I just get clarification on the personal guarantees? You say that the bank always took personal guarantees from individuals. What was the situation when a developer ... when the loan was being applied in the name of the company, as opposed to the person?

Mr. Tom Browne

Yeah, so if it was being ... if the loan was being drawn down in the name of a company, the client or the person would have had to sign a personal guarantee to support that loan.

So it's the same thing.

Mr. Tom Browne

Yes, so if you borrow personally you're on the line-----

Mr. Tom Browne

----- you've got personal liability. If you borrow in a company you'll be signing a personal guarantee in support of the loan.

So, their house or whatever their assets, their personal assets-----

Mr. Tom Browne

Would have been on the liability.

And you say that this happened on all occasions.

Mr. Tom Browne

That, sorry ... that was very much part and parcel of the actual process in Anglo, the personal guarantees were actually looked for.

But you testified that in all loans that this was the case.

Mr. Tom Browne

Sorry, in all loans it would have been looked for and that was part and parcel of actually kind of the process. Now-----

The reason I ask is, Michael O'Flynn has come before this inquiry, which ... where he had, I think, loans with a range of institutions, but 50% of them were with Anglo Irish Bank. And he has given evidence to say "I never issued personal guarantees to any lender in relation to the business".

Mr. Tom Browne

In that situation we obviously didn't take personal guarantees.

So it wasn't every loan.

Mr. Tom Browne

No, sorry-----

Every loan wasn't backed by a personal guarantee.

Mr. Tom Browne

You know, maybe that was a very ... too general a statement, but as a matter of form, right, we would have always looked for personal guarantees, and I-----

Of ... of, for example, not wanting to individualise it, but are you suggesting that this case where we know - well, where it has been given in evidence - that there was no personal guarantee ever given, you are suggesting that a personal guarantee would have been asked for, is that what you are saying?

Mr. Tom Browne

No, no, I'm not saying ... again I, you know, again it depends on where that relationship started out from.

What was the policy? Just explain. You're the head lender in Anglo Irish Bank.

Mr. Tom Browne

The policy-----

Explain the policy because we're ... you told us there was personal guarantees in all loans, now there was not in all loans but they were always asked for, now you're not-----

Mr. Tom Browne

The policy very clearly was ... your starting position ... you'd be looking for personal guarantees on all loans.

Mr. Tom Browne

Sorry?

Did you look for it? Did you-----

Mr. Tom Browne

Yes.

Okay, so in relation to this loan for example, you would've requested of O'Flynn Group for a personal guarantee.

Mr. Tom Browne

And again, depending on where the relationship started out, it obviously wasn't looked for at that ... in regard to that case.

But you're just after telling us that they was ... they were looked for in all cases.

Mr. Tom Browne

But the policy very clearly was, you would start out looking for a personal guarantee and then-----

Yes, and I asked you "And did you?" and you said "Yes".

Mr. Tom Browne

And in the ... in the vast majority of cases the personal guarantees were signed.

So not in all cases.

Mr. Tom Browne

In the vast majority of cases, yes.

Without changing the subject, I just want to round something off on this and we'll stop the clock a second. In just the general area of securitising loans, did you follow that up, this process, with law firms?

Mr. Tom Browne

Yes.

Did you actually have a legal process for following-----

Mr. Tom Browne

Yes.

-----up the securitisation?

Mr. Tom Browne

So, the way it worked, Chairman, is that the ... the law firm was appointed to put the security in place on behalf of the bank.

Okay, and maybe you could just explain to us in that regard when we had the transference into NAMA, the letters of undertaking that were required seemed to be a huge issue in terms of securitisation, the incompletion of legal work by banks and securitisation, and all the rest was a very, very ... was a legacy issue that NAMA had to deal with quite quickly to get its, kind of, deeds and portfolios sorted out. How did Anglo perform in that regard?

Mr. Tom Browne

Again, it would have been the responsibility of the individual lending manager.

No. I know well. I'm talking about the process when Anglo came in. How did they rate in compare to other institutions in having their legal undertakings completed when the portfolios were transferred into NAMA?

Mr. Tom Browne

I don't know. I've no visibility on that because, you know, I wasn't involved in it. I wasn't in the banking world at that stage, so I've no ability to answer that question.

Okay. Deputy Murphy, sorry, Deputy Doherty.

Well, I was just going to go on to that issue in terms of security and the perfection of security. And Deputy Murphy rightly outlined the €477 million, I think it was, from NAMA, but NAMA confirmed that that for the institution - the individual banks - was in the region of €2 billion. That's how much loans that could not be perfected because of ... or could not ... had to be written off as a result of unperfected security, and the majority of them rested with your bank. We see on the core documents, Vol. 2, page 63 ... we see an example of 12 files that was carried out. And of ten of those files, no letter from the bank's solicitors confirming the security was complete is evident, that's, 83%. These are loans above €6 million. It talks about the credit policy where draw-down shouldn't happen unless it's authorised in writing by a manager before the perfection of security, but we see that the draw-downs were taking place. And I think in the situation the number of draw-downs up to the time of the review for the 12 selected loans was 67. So, again, we are seeing, like, loans of €149 million which were drawn down with no solicitor's letter on file. So, as a result of your credit policy, that would have had to be authorised by a manager. So, it's not solely the responsibility of the solicitors.

Mr. Tom Browne

No, that would like ... sorry, ultimately, ultimately, the responsibility would come back to the individual portfolio manager dealing with those cases.

Yes, and ultimately you as head of lending would it be?

Mr. Tom Browne

Yes, ultimately me, okay.

Mr. Tom Browne

So in those cases here, you look, kind of, in terms of the jurisdictions there. They were across jurisdictions-----

What do you mean "cross jurisdictions"?

Mr. Tom Browne

Well, you have sterling loans, US dollar loans, right, so ultimately, right, the responsibility for the security being put in place lay at the foot of the portfolio manager and ultimately the directors of the division.

Yes, these are Dublin... just see the top of the paper ... these are Dublin loans.

Mr. Tom Browne

Yes, so therefore then, we would have been ... we would have ... somebody would have had to sign off, right, okay, on the draw-down of all that money, and in the draw-down form it would have been ... it would have asked, "Has the security been perfected?".

And you would have been told "No, it's not", and you still allowed for draw-downs, for example, of €149 million without any security being effected, £11 million sterling without security being effected, US $30 million, €23 million in another one, €18 million in another one, €14 million in another one, and so on. And that's only ten out of the 12 loans that were inspected, 83%.

Mr. Tom Browne

But again, you have to look behind each of the individual loans and see why ... why was the loan drawn down. The security could have been perfected, but it may not have a letter on the file.

Well, given the fact that we know that €2 billion from the financial institutions that went into NAMA of loans that were issued, had to be written off basically - the security wasn't perfected and the majority of them rested with your bank - do you not think that there was a serious issue here, which this audit was outlining to you?

Mr. Tom Browne

Yes, and again, on the basis of this audit, right, action would have been taken to ensure that, you know, you got the letter on file from the solicitor. But, like, the reality of it is ... is that whilst you may not have the letter on file, right, the security, would have been in place, and it would have been signed off by the respective authorised signatures that the security was in place.

But can I put it to you that the reality that we're dealing with today is that, according to NAMA, €2 billion of loans issued by financial institutions, of which the majority of them rested ... originated from your institution, could not be pursued because the security was not perfected? So, it's not ... it doesn't seem to be the case that this was just a delay, that the letter was in the post or something that this ... these loans had to be written off. People who got this money were not pursued as a result of this type of ... managers authorising draw-downs of loans without perfection of security.

Mr. Tom Browne

And again, I would say to you, on the basis of, you know, the responsibility there, right, in terms of perfection of the security was with the law firm that was actually-----

That's fair enough, but is the responsibility not with you, as head of lending, not to issue the money before the perfection of security is there?

Mr. Tom Browne

And again, right, in regard to all ... you have to look behind all of these cases to see why, you know ... there's a reason behind why the loans were drawn down, right, without having the letter on file, right. And the follow up would have been, right, to actually, kind of, make sure that the security was put in place, and a letter in the file from the legal firm, you know, verifying the fact that the security had been put in place.

Do you believe that the security was put in place in all of these loans, despite what NAMA has told this committee?

Mr. Tom Browne

Obviously, you know, on the basis of what NAMA saw after the event, right, there was loans of where the security wasn't fully perfected.

Do you take any responsibility for that as head of lending?

Mr. Tom Browne

You know, ultimately, it comes down in my ... you know, when I was there for the period of time that I was there. But, like, you know, I was there up to, kind of, September 2007. What happened after, that I do not know.

Okay, and ... but you take responsibility up until that period. Is that what you're-----

Mr. Tom Browne

Yes. No problem with that.

-----telling me? Can I ask you ... it was mentioned in terms of the culture of lending within the bank and it was talked about in terms of the auction ... evidence that we've had ... you've mentioned that you haven't read the Nyberg report, but have you read Anglo Republic?

Mr. Tom Browne

Anglo Republic ... which one was-----

Book by Simon Carswell.

Mr. Tom Browne

I have read it, yes.

Okay. The opening chapter of that there deals with the biggest transaction in the history of the Irish property bubble, a transaction that totalled €1.165 billion. It suggests that the property that was purchased was purchased at 2 o'clock in the morning. A manager from Anglo landed with a bank draft for the purchaser ... to the ... for the purpose of the purchase of that property. Is that an accurate reflection of what was going on in Anglo - that Anglo was on call at 12 o'clock at night, landed down to the office where this auction - so-called auction - was taking place and produced a bank draft at 2 o'clock in the morning to allow this developer to buy the biggest valued asset in the history of the Irish property bubble?

Mr. Tom Browne

What transaction are you referring to, Deputy?

Well, it's in ... it's in the prologue of ... it's the opening chapter ... it's the opening words of Anglo Republic. It's the Jury Inn property and it was ... the question is in terms of the ... the ... the ... the culture-----

Mr. Tom Browne

Yes.

-----is this the type of activity that was going on in Anglo?

Mr. Tom Browne

No. I think that is an unfair reflection, you know. You know, there was a very clear culture in the bank, right, of a loan process that went from ... you know, the team that actually originated the loan or the team who managed the exposure, they would actually look at the actual ... the individual loan. They would decide whether they felt that loan was worth bringing to actually what we used to call our mini-credit committee meetings. The mini-credit committee meeting was a meeting amongst the lenders like in a room like this. There could be 20, 30 people who would actually ... the loan would be presented, it would be debated amongst the actual ... the lenders. If the consensus view was that the loan was a good loan, it would go on to a main credit forum in terms of, actually, for final sign off where non-lenders and risk would have been the final arbitrators of the individual loans. In some situations, you know, there would have been forums - gathered quickly - of senior people to decide whether a loan was actually one that was worth doing in terms of acceptable levels of risk, but the vast majority of, actually, loans would have gone through a very formal process of approval. As I say, from the team up to the mini-credit situation to the main credit situation and being signed off at that level.

But did we have ... the question I am asking is, did we have - as is reflected in this book - at around 2 a.m., a senior lender from Anglo arrived at William Fry with a bank draft for €1.165 billion? Is that ... was there-----

Mr. Tom Browne

Well, before they ever got to that point, Deputy, right-----

Yes, there was a process.

Mr. Tom Browne

-----there would have been a huge ... for something like that, there would have been a massive amount of debate. It wasn't someone rocking up with a cheque for that level at 12 o'clock at night. There would have been a massive level of discussion and debate in regard to the merits, demerits of actually doing the deal. So, you know, that - the way it's portrayed - is actually kind of, you know, not the way it happens.

Okay, so, there would be an upper limit for-----

Mr. Tom Browne

There would've been a huge amount of discussion around that. It wasn't somebody kind of, as you say, rocking up at 12 o'clock at night to William Fry's. There would have been a massive amount of discussion around an exposure such as that. And then, going back to my point, you know, there was a very formulaic approach from the ground up in terms of, actually, approval of loans. Every loan, you know, went up to credit committee every year for review and every loan was reviewed by risk - in the early days, four times a year, and in latter years, two times a year. And out of those review processes came what probably was the most important management tool, which was the actual watch list. The watch list was, you know, the individual loans on each portfolio that needed attention. The attention was decided by the risk people in terms of what action was ... was to be taken in regard to, you know, correcting the situation that they weren't happy with.

It all sounds absolutely fantastic and it sounds great, bar the small point that the bank cost the State €30 billion as a result of loans ... the loan ... the loans that were issued.

Mr. Tom Browne

And again-----

It sounds very robust and-----

Mr. Tom Browne

No, but, and again, Deputy, from the point of view of ... actually, it was a very robust process, okay. You know, as I said earlier on, the mistake that was clearly made, right, in terms of, actually, the property development loans in particular, was that we did support, you know, probably our top 20 clients too robustly against intense competition and we got too big with those exposures. And I think they would have caused an awful lot of difficulty when the property market went into its nosedive.

We've seen ... there's figures in Vol. 1, on page 57, for 2008 but they reflect also a similar pattern in 2007 - and this is on page 57 of Vol. 1 - and it's the exceptions to group policy lending credit policy. We're seeing an average of about 25%. So, what of all your loans are exemptions ... exceptions to your own policy?

Mr. Tom Browne

Yes. That's a very good question.

How do you stand over that as head of lending?

Mr. Tom Browne

Yes, well, I think you have to look at the exceptions. Every exception has to be look ... looks ... looked at in terms of its materiality. An exception could be the following: if credit policy says that interest cover has to be 1.3 times, the lending manager brings a loan to credit committee and, say, the loan is €5 million and the interest cost is, say, at a rate of 5%, so that means the cost of funding that loan is €250,000. So, at 1.3 times, you need €325,000 of income to actually tick the box in terms of-----

Mr. Tom Browne

-----in terms of interest cover. But if the loan comes up and it only has 1.2 times of income, so it's only got €300,000, it'll be shown up on the actual ... the actual credit application that this is an exception to credit committee. It'll be debated whether it'll, actually, should be done and in that situation it's decided, for a whole host of reasons, why the credit would be signed off.

Mr. Tom Browne

If I go back to your picture ... your thing ... your page 57, if you look at that, right, okay, you know, where from February '08, 26% went to 42%, right, okay, if you look at, kind of, the comment underneath it - "The percentage increase in exceptions for July is primarily due to lenders applying a 20% discount to security values." Obviously, this is, you know, into 2008, you know, a year after I left the bank and obviously what the bank was doing at that stage, because asset values were under pressure, when the loans were going up for, actually, their annual review, the actual value of security was being written down to reflect the fact that the market was actually ... asset values were actually on a downward spiral. And that's where you've got the increase in that period of time. So, you have to look behind ... there was an individual story behind every exception. And exceptions, you know, on the basis of ... you have your lending policy, right, okay, but if it's an exception to credit policy, it's put up very clearly upfront, right, for a decision to be made whether you would actually want to approve the actual ... the credit, if it's outside policy. And that could be for a whole host of reasons. Like, it could be there's other security that ... cross-secured. There's ... the client could be a depositor of the bank. The client, you know, could be, you know, have another, kind of, relationship with the bank in terms of, actually, on the private banking side. So, there is a whole range of issues that could determine why you would actually, kind of, approve a loan-----

A final question, Deputy.

Mr. Tom Browne

-----that was outside of credit policy.

Okay. We've heard testimony from ... from others in the committee, including Professor Honohan, which talks about the damage was done, you know, in the period running up to 2006 ... that period ... that when you were going into 2008, it was too late. Can you explain to me - and that was ... obviously ... coincides with the period when you were head of lending of Anglo Irish Bank for the Irish division - can you explain to me how NAMA had to apply a 61% discount to loans that your bank and you, as head of lending, approved? How did you get it so wrong and ... when we compare it to other banks which had haircuts but not as high as 61% applied to them?

Mr. Tom Browne

I think ... as I said in my opening statement, I think the big ... the biggest issue looking back at it now is that we got very big with a very small number of clients who were the most active in the market at that time. We defended our position too strongly with these people and our exposures went to levels that were unacceptable and as a result of that then, you know, the haircuts that the bank, you know, obviously were forced to take because they were very big exposures with clients reflected in the fact of what happened when NAMA came into being. And, you know, I've openly admitted it here tonight that we did actually defend ourselves too strongly with a small, select group of clients-----

What does that mean - defend yourselves? Does that mean continue to give them money when you shouldn't have given them money?

Mr. Tom Browne

No, I think again looking back at every ... all the loans at time look on the basis of ... when you looked at them, they had acceptable risk but I think the biggest issue looking back there now is we didn't cap out our exposures with some of these bigger clients and say that's, you know, that's as much as we can do and without ... that's the mistake that was made in hindsight.

I'll let you back in again, Deputy, as we wrap up. I just want to kind of come into an area myself which is probably a summary where Deputy Doherty is at so I won't drill back down to the detail. I'll just take it at top level with you, Mr. Browne, which is with regards to the bank's lending approach. What was your view of the lending policy procedures and prevailing culture? Was it the kind of ... was it the norm as reflected in the wider banking sector or was it a very aggressive one or was it passive? How would you reflect upon that now?

Mr. Tom Browne

I think the ... as I said in my opening statement again, I think what the bank had developed over kind of the period '95 to 2005 was a very active client base, Chairman, where there was a very high level of repeat business from that client base. There was huge loyalty from that client base and we continued to support those clients probably too strongly into a period when the market was actually getting overheated.

But in cultural terms, coming back to Deputy Doherty's earlier question that there was ... the level of exceptions, could it be put forward or not that the question was "yes, we do have an exception policy and there's a culture reflected in that and that's why we have 25%, in that we have a different view of what exceptions are hence we have such a high level and that's a cultural position in the bank"?

Mr. Tom Browne

Again, I think you have to look behind. I think if you look at ... if you talk about exceptions kind of in a very naked way, I think you have to look behind every individual loan-----

But there is a kind of a ... but in every organisation whether you study it academically or exist in one, every organisation has a culture. This structure is ... this committee has a culture-----

Mr. Tom Browne

I think the word you'd use ... Anglo was a very commercial organisation.

Mr. Tom Browne

That's the word I would use, Chairman, and, you know, you actually, you took a view on each case, right, on its merits and if it was outside of exception, there was a, you know, there was a general sign-off of the credit based on a ... you know, as I said as a collective forum at credit committee to say "yes, we're happy with the risk".

And coming on to the credit risk then and in your opinion, did you believe that the controls adopted by the bank were sufficiently robust?

Mr. Tom Browne

Again, looking back on my time there right, I, you know, I never thought that the actual credit function ... the risk function was anything but robust and independent in terms of the review.

So were you voicing any concerns at that time?

Mr. Tom Browne

In terms of?

In terms of the credit risk controls? You weren't articulating any concerns at that time, no?

Mr. Tom Browne

Again, because again I would have felt that the actual risk function, the risk function, Chairman, was a very independent-minded function in terms of actually their view of whether the risk was acceptable to the bank or not.

All right. I'm going to ... I'm referring to three different documents but I'm just going to bring up two pages as examples of them. One is regard ... they're all in Vol. 1. One deals with risk appetite, the other one's minutes of risk and compliance meetings and the other one is an extract from the loan review summary. So in core book Vol. 1 there, I'm just bringing up on the screen ... I think it's page 97 if I can just have a look at it there ... page 97. If we just to go to the bottom of that page there, Mr. Browne, it says:

Residential development accounts for 67% of development overall. Exposure [of] zoned land without planning primarily related to the Bank's Top 10 customer relationships with whom the Bank has a long and satisfactory track record [and] It was noted that the exposure to the unzoned land was not significant.

And then I'll just go on to page 101 in the same book and we might just leave this one on the screen then afterwards. If you go to 101, and it's the second table down there where it gives a breakdown of the areas of the exposures, I'm assuming that sum on the left is €10 billion, is it ... €10 billion and €600 million ... on the left, yes ... is that €10 billion?

Mr. Tom Browne

Yes.

Okay. All right, so the other ones then are €627 million unzoned land; €3,580 million on zoned land; just about one-and-a-half billion on zoned land with planning permission and over €600 million, €641 million in fact, with speculative development and then the development, what's the "w/c" there? What does that mean? Development?

Mr. Tom Browne

Working capital.

With working capital with pre-sales and pre-lets of €4,240 million. Right. Did you have any concerns over the extent of the bank's exposure to the development sector?

Mr. Tom Browne

Absolutely and that's why we tried to bring in the new policy change in early 2006 and if you look at kind of the comments there in terms of the real issue in regard to ... the big risk in any bank around development lending is around its land exposure.

Okay. So how did you raise those concerns? What actually happened because this is ... you say you raised it in 2006? This is 2007 and this is what the portfolio is showing.

Mr. Tom Browne

Absolutely and again, it goes back to the point that, you know, a lot of, you know ... a significant amount of that exposure would have been to our top clients and again, it's ... again highlighting, you know, the mistake that was made ... that we didn't cap out with some of those bigger clients.

Maybe you can just talk me through this so I can understand it. There is a risk analysis being done here in terms of exposure and what is happening is that property is being broken down into different sort of categories. Am I correct there, yes?

Mr. Tom Browne

Absolutely and based on the risk element of the actual ... going from unzoned land across to development with pre-sales, your high-risk category is your unzoned land and then you move across in terms of the risk profile so your risk profile in terms of your development ... with pre-sales, pre-let, you believe you're actually kind of, you know, you're working out there ... in terms of actually, your pre-sales, pre-lets will repay your debt. The real issue here, when you look at kind of where the risk was, is around unzoned land and zoned land and again, the mistake that was made is that we continued to support people who were actually kind of acquiring, you know, that type of asset.

But could I put it to you. Mr. Browne, that the real risk, as a counter-proposal just to challenge that statement if you don't mind, is that basically what we have here is a sectionised area of one single sector, which is property, albeit in different manifestations, and that Anglo were overly concentrated into the property market?

Mr. Tom Browne

And that's why we endeavoured, you know, in the years from kind of, you know, '04, '05, '06, '07 onwards, to actually spread the actual ... the risk by moving into other areas like cashflow lending because it was recognised within the bank that we had an over-dependence on exposure to property, both development and investment.

How long of a period of time did this difficulty take to create?

Mr. Tom Browne

Here?

Mr. Tom Browne

Well those clients, for example, you know, the main ... the bigger clients we would have had would have been on our books for probably ten, 15 years.

So this was a crisis that developed over a period of time?

Mr. Tom Browne

And I think, you know, when you look at kind of, you know ... probably, as I said earlier on, what clearly came to our attention from probably the spring of 2006, the residential market had hit its kind of peak.

But this was a problem that had developed over a period of time.

Mr. Tom Browne

Yes but-----

And was that problem developed through Anglo's lending practice?

Mr. Tom Browne

I think it was a combination of the way the market was starting to actually soften, you know, from probably 2006 onwards. We had built up an exposure in those areas over a number of years prior to that.

So would it ... would ... you repeated a number of times this evening that you departed in September 2007 or so but were the difficulties that came to unfold after post ... after 2007 already in the ether and already in play before 2007?

Mr. Tom Browne

I suppose that's a reflection of where the property went after 2007. You know, everybody felt-----

Can we come back here? The risk is already in place, as you say, from 2006.

Mr. Tom Browne

Yes but in 2007, right, the consensus view at the time was that, you know, the market was definitely starting to actually kind of get soft but a quantum of actually the collapse was not felt for a number of years thereafter.

Okay but ... if I can maybe use an analogy, and it is not like somebody getting off the Titanic in Cobh because what happened afterwards was completely different, but subsidence in a house takes place because there's a drainage problem not fixed and all of a sudden somebody has to come in and the underpinners and it costs a big load of money. So it's not that the wall fell down yesterday is what the problem was; it's that there was a problem not addressed over a long period of time and, hence, a major intervention. Was the problem in Anglo growing like a subsidence issue because there was a difficulty underpinning the structure, or was it that something happened later in 2007 that was unforeseen, and where did that come from?

Mr. Tom Browne

No, I think, you know, the growth in the loan book had happened over a period of time. You would have been very comfortable, you know, up to 2006 in terms of where you were at in terms of the overall exposure, but from 2006 on, as the market definitely became softer, we tried to curtail our activity in regard to actually this element of the market and, unfortunately, we did continue to support some of the bigger clients who were the most active players and, as a result of that, the loan balances grew.

Okay, thank you. Deputy Joe Higgins.

Mr. Browne, in that regard, is it the case that you gave extraordinary support to a handful of clients because from 2004 to 2005 customer lending went up by €10 billion in 2006, it went up €16 billion and in 2007, €17 billion? Now if that was in a period of restraint, how do you explain figures like this?

Mr. Tom Browne

Are those figures in regard to the overall bank or just Ireland?

Mr. Tom Browne

Yes, but at that time, Deputy, you know, the group was expanding, you know, and had significant growth in the UK and in America at the same time. So the bank, you know, was not just growing in Ireland, it was growing across a geographical spread and it was felt at the time that that was a good strategy to adopt, that Ireland was a wealthy-----

Do you accept that they are enormous figures?

Mr. Tom Browne

Yes, I do accept they were very big figures.

And, Mr. Browne, can I ask you ... you were director of lending Ireland, 2004-2007-----

Mr. Tom Browne

2005-2007.

2005-2007. You were ... risk and compliance committee 2005-2007. Are you saying that you gave full financial information to the board on the lending situation and, indeed, other aspects that you were responsible for during your time with this responsibility? And did any board colleagues ever express concerns to you or to other directors about the quality of information provided to the board?

Mr. Tom Browne

No, there was never any ... the board was given full transparency in regard to actually the loan book of all jurisdictions. The risk function would have reported to the board every time they did a loan review process. The top ten exposures would have been identified to the board on an ongoing basis. At no stage did I get a sense that the actual ... the board members were getting anything but a fully comprehensive overview of the loan book from any jurisdiction.

Right, you say in your opening statement, written, Mr. Browne, "in relation to exception management where a loan was being put forward that was outside of credit policy, this was clearly highlighted in credit papers for discussion at the credit committee meeting as to why the credit should be approved if an exception to credit policy and your decision to be made in relation to same at the credit meeting...". Could I ask you to look at - sorry, I didn't give notice of this - page 3, in Vol. 2 of the IBRC book? You have it yourself there, Mr. Browne, Vol. 2, page 3, it is easily got. This relates to documents from IBRC liquidators in NAMA, exceptions to credit policy for Anglo loans, and the findings at the very bottom and the very bottom paragraph:

Of the 1,731 cases reviewed at client level, the number found to have represented an exception to credit policy was 1,073 or 62% of clients. The aggregate value of the exceptions identified was €31.97 million or 92% of the value of the Book which transferred to NAMA.

That is a typo. Actually it is a billion but it says a million on the page but it is actually a billion.

Mr. Tom Browne

Yes. It is billion, Chairman.

Mr. Browne, 92% of the book that was transferred to NAMA was by way of exception to credit policy but how do you explain ...

Mr. Tom Browne

Deputy, if I take you back, I think the answer is in the book itself, right. If you go to book number, Vol. 1, page 57, I think it is ... if you again go back to that table where you see the level of exceptions in 2008 over a period of February '08 to July '08 has dramatically jumped from 26% to 42%, so ... and the reason for that is ... it states there in the document that, "The percentage increase in exceptions for July is primarily due to lenders applying a 20% discount to security values." Now I presume what happened thereafter is that as asset values continued to actually collapse over the period of time, '08 onwards, every time the actual credit was going up to renewal on an annual basis, it was being highlighted as an exception because the lenders were actually applying bigger and bigger discounts to the underlying security. So, when that report was done it reflects the fact that within the bank, from probably '08 onwards, they were actually discounting the underlying value of the security, hence it shows up as an exception. When I looked at that as well, the only rationale I could come up, in terms of why that figure is such ... it's based on that the bank was, obviously, applying more and more discounts to the underlying security.

You are saying a retrospective ... retrospectively applied.

Mr. Tom Browne

Yes, because every credit would go up to credit committee for an annual review, so a policy was, obviously, adopted in '08 after I had left the bank where they saw asset values were actually starting to actually decrease and, as a result of that ... because, you know, it says 20% discount, it could have been higher thereafter. So every time a credit went up, it would, obviously, be shown as an exception to actually credit ...

Okay, I think we may want to get clarification on that from liquidators and NAMA but in any case, Mr. Browne, the fact that there was such a huge transfer of your loan book to NAMA at such a huge discount, does that imply that there was huge pressure on your employees to expand and expand lending way beyond safe limits?

Mr. Tom Browne

No. There was no pressure on anybody to expand lending. It didn't work like that. There was no pressure whatsoever on the actual ... on the lenders-----

Mr. Tom Browne

-----because the reality of it was ... is that, I think, the key thing that drove the growth of the book was a function of a client base of the bank, which was a very active client base.

Mr. Browne, you said you had read the Anglo Republic book by Simon Carswell. He portrays a different picture based on interviews with former employees and you've probably seen it where he says ... I have not time to quote it all, but I will just quote, as follows from page 50 ... the credit committee meetings - "It was a cross between a Nuremberg rally and the half-time talk to an American football team,' says one ex-Anglo manager. 'There were between fifty and sixty people in the room ... The whole system was set up wrong. No one was going to dissent in that atmosphere." That suggests ... Do you agree with that?

Mr. Tom Browne

I don't agree with that at all.

Okay. Can I ask you a final question then, Chairman, because my time, unfortunately, is up. It is this-----

Take more time, if you wish there now.

Mr. Browne, do you ... oh, yes, a second last question then. In the annual report for Anglo Irish Bank 2006 ... you were also involved in the human resources department, is that correct?

Mr. Tom Browne

Yes, I was head of group HR as well as ...

Okay. Can I ask you what was the reason for Anglo Irish Bank's anti-trade union policy, and were you an originator or an enforcer of that?

Mr. Tom Browne

No. I was not an originator or an enforcer of it.

And what the rationale-----

Try not to be leading now, Deputy, even though I am giving you more time.

I am giving you a bit more time but try not to be leading in the question.

Yes. I'm not leading, Chairman, because in minutes of a board meeting where there was to be a merger proposed-----

-----one of the downsides, according to the bank management, was the fact that the union would now come into the reckoning.

A question.

I am just asking ... non-union policy, let's say that, what was the reason for that?

Mr. Tom Browne

The view was there was ... the view within the bank ... that if people wanted to bring a union in, it wasn't actually, kind of, stopped but there was no requirement to bring a union in because the staff didn't seem to demand it.

Right, finally then, Mr. Browne, you ... I think you did say you regretted the damage that has been done to the economy in relation to what happened in the banks. Did I hear you correctly in that regard?

Mr. Tom Browne

Yes.

And do you accept that there have been rather serious and very bad consequences for ordinary people as a result of the bubble and the bust?

Mr. Tom Browne

Absolutely, Deputy. You know, it is with deep regret what has happened.

Is there an irony then, Mr. Browne, that you now run a debt-restructuring company and involved with you are-----

That is not on.

-----some of the biggest debtors in NAMA?

Sorry, Deputy, I'm moving on. Senator Sean Barrett, please.

What's wrong with that?

You're outside the terms of reference, timewise and everything else. There's also an implied statement with regard to an institution that has not been called before us and its operation.

I was just asking Mr. Browne-----

I know that and I'm moving on.

-----if there's an irony in the fact that he's-----

I know that and I love to give you as much time as I can, Deputy, but in this case I have to pull back. Senator Sean Barrett.

Thank you, Chairman. Thanks for coming in, Mr. Browne. The Anglo annual report for 2007 on page 3 shows that over the period 2002-7, profit before tax increased by 376%, earnings per share by 363% and total assets by 398%. Do you think that these levels of growth were prudent or sustainable in the context of the level of competition in the Irish lending markets during that period?

Mr. Tom Browne

Sorry, Senator. What period again was it?

I'll give it to you again. I must have spoken too quickly. The Anglo annual report for 2007 shows that over the period 2002-7, profit before tax increased by 376%, earnings per share by 363% and total assets by 398%. And then the question was: do you think that these levels of growth were prudent or sustainable in the context of the level of competition in the Irish lending market during that period?

Mr. Tom Browne

I think, Senator, what they reflect is again going back to the very active client base we had in a very active market where we enjoyed a very high level of repeat business over those five years. So they were a function of, you know, as I say the client base that had ... the bank had developed, probably over the previous ten, 15 years who were very active in the marketplace.

And then were those levels of growth ... do they imply that the pursuit of growth was affecting credit quality and lending standards?

Mr. Tom Browne

Again, going back to the point about kind of, in terms of the process of lending in terms of actually ... every loan that came up for approval went from the team doing their due diligence to the mini-credit forum, who actually was the lenders themselves deciding whether the risk was acceptable. And then going on to main credits where group risk was the final arbitrator whether the risk was acceptable. So that process was the standard approach in terms of actually, kind of, the individual loans that were actually underwritten at the time.

In Vol. 1, page 37, Mr. McAteer and Mr. Moran sent a memo to the board in 2007 - "High growth banks seldom die of old age". They say, "A key balancing act for us is to impress upon the market that Anglo's growth is delivered in a measured and conservative manner, without loosening our credit standards." Isn't your evidence to Deputy Doherty and Deputy Higgins that there were 92% exceptions and Nyberg found that the audit committee ... neither the internal audit nor the audit committee was in a position to challenge credit decisions where the main problems ultimately arose? I mean, wasn't the model unsustainable?

Mr. Tom Browne

Again, you know, I don't think ... it wasn't unsustainable in the context of where we were at at that moment of time. The exceptions, as I explained ... you have to look behind the reason behind the exception in every loan. You know, at the time in the marketplace when you were actually going out to investors, you were being quizzed on a continuous basis in regard to the sustainability of the model. And in every situation we were actually able to kind of explain why we felt the model was sustainable. And the growth in the bank really in the years was going to come from markets such as the UK and the USA.

But didn't Davy Stockbrokers and Merrion Stockbrokers in early 2007 and about a year later put the shares as overvalued by two thirds?

Mr. Tom Browne

But again the market was the one who dictated where the share price was at. That was the market taking a view where they felt the value of the share was at.

And a reflection that this model was unsustainable because it was based 88% on property, following a property boom which was ... when the bubble was bound to burst, wasn't it?

Mr. Tom Browne

That's why we were trying to actually spread the risk in terms of our entrée into other areas of the marketplace by developing kind of other aspects of the business.

But did you ever get your lending share to industry even into double digits?

Mr. Tom Browne

Sorry, Senator?

Did you ever get the share of the loan book in industry above 6%, 7%, 8% even? It was 88% property. You were a monoline bank.

Mr. Tom Browne

Absolutely. And that was why we were trying to actually kind of spread the risk by actually developing an approach into other areas of the market, because it was recognised within the bank that we were too property dependent.

And were you aware of the literature that, you know, fast growing banks as the quote that they gave at the board meeting-----

Mr. Tom Browne

Yes and again----

They do come to an end because it's-----

Mr. Tom Browne

And that's why again-----

-----it's not solidly based.

Mr. Tom Browne

And that's why again you were trying to actually kind of diversify the bank from both a geographical point of view and also from a sectoral point of view here in Ireland, because it was clearly identified that we needed to actually, kind of, reduce the over-dependency on lending to property.

So were you surprised, after you left Anglo, that it did collapse with 61%-----

Mr. Tom Browne

I was-----

-----discount-----

Mr. Tom Browne

Yes, because-----

----- when it transferred to NAMA?

Mr. Tom Browne

-----when I left the bank there was absolutely no sense at all that there was any stress on the system either from the credit point of view or from the funding point of view. So I was shocked when I left the bank in ... after I left it in 2007 because I had no ... as I said in my opening statement, it was alien to me that there was kind of a liquidity or a solvency issue coming up the track as I was leaving in 2007.

The St. Patrick's Day massacre, did that cause you to change your views?

Mr. Tom Browne

Well, obviously the market was talking at that stage. I'd left the bank ... well and truly left the bank at stage. And obviously there was other issues going on in terms where ... the world financial markets were in crisis at the time and it was rebounding back on all the banks here in Ireland.

Did they react in the correct way from the bank's perspective to the CFD? Were they too slow to react? What would you have done if you had known earlier about the CFD purchases?

Mr. Tom Browne

Chairman, I don't think I can go-----

I don't think you can either. Final question, Senator.

Sorry, I did not intend to-----

That's all right.

----- cause difficulties; it was a genuine question. Thank you, Mr. Browne, and thank you, Chairman.

Thank you very much. Deputy John Paul Phelan.

Thank you, Chairman. Good evening Mr. Browne. Firstly, I want to refer to the book that has been referred to by many others, Mr. Carswell's Anglo Republic. In it, it states that you were paid €3.75 million from Anglo when you resigned in November 2007 as a golden handshake or retirement package. Is that correct?

Mr. Tom Browne

That's correct, yes.

How do you feel, yourself, now in light of what we've subsequently discovered with Anglo and its operations and the cost to the Exchequer about that sum?

Mr. Tom Browne

I suppose every day I worked in Anglo I worked kind of to my best of my ability. I suppose I used my best judgment in any decisions I made or any decisions I influenced while I was there. When I left the bank in 2007 I felt I'd done a good job and I felt I left behind a bank that there was no undue stress when I was walking out the door. So all decisions I took when I was there and implemented, I took them all in good faith. You know, when I handed in ... when I told the chief executive and the chairman that I was leaving, it was the board's decision to actually decide whether I was entitled to, you know, a payment. I decided I was leaving. Whether I got one or not was irrespective. I was leaving, my race was run. And, you know, the board decided that they were going to actually recognise my efforts over the previous 15 or 16 years.

That's fair enough. I was reading your ... part of your biography there, during your second term in Anglo, and it is remarkable reading because you seem to have held a lot of different, kind of, roles within the bank at the ... at the same or similar times. You were the head of ... managing director of lending for Ireland between 2004 and 2007, when lending went from €3 billion to €38 billion.

Mr. Tom Browne

Sorry, from 2005.

€13 billion, sorry, to €38 billion. Do you think ... do you think, I suppose, basically, that was a sustainable level of increase for that four year ... for that four-year period?

Mr. Tom Browne

It wasn't sustainable, it just happened, you know, in terms of, you know, you'd a very active client base in a very active market with a landscape that actually created those type of opportunities, and we had a client base that we continued to support and, as I said earlier on, we supported too strongly.

Okay. Again referring to the ... Mr. Carswell's book, it is noted in one point, or mentioned in one point, that you have been critical of senior management in Anglo. I'm instructed by legals not to get involved in that discussion and I-----

We are not dealing in a legal framework, so it's not that you're instructed, you're obliged.

Yes, and I'm obeying the instruction. But I want to know, do you feel yourself that there was any of your conduct, or "any of your own conduct" is probably the wrong word, but any things that you did, particularly in your time as head of lending in Anglo, that contributed to the financial difficulties ultimately a year after you left and to the, you know, exposure of the taxpayer to billions of euro of ... that's lost?

Mr. Tom Browne

I don't ... I don't understand your question.

Yes, you ... I was referring to the ... that you had been critical of senior management in Anglo.

Mr. Tom Browne

Sorry, where do you get that from?

It's from Mr. Carswell's book-----

Mr. Tom Browne

Sorry I-----

Mr. Tom Browne

Can you ... can you-----

I can. Page ... it's the Kindle version, page 5911, where he said, and I'll quote it, the conduct of senior officials at Anglo had ultimately proved-----

I think I need to be mindful of allegations there now.

Sorry this is not an alleg----- this is a published-----

Yes, I know, there ... the ... as we mentioned before the meeting here, I would urge the Deputy to err on the cautious side rather than to create a risk. We're just about a day away from concluding public hearings. We haven't ended up in court yet and I'd like to see the closing line in the same manner.

Okay, look it, really the point I suppose I'm trying to ask you, Mr. Browne, is do you feel ... you're saying that Anglo was grand when you left in 2007. You were head of lending for the preceding four years, if you like-----

Mr. Tom Browne

Two and a half years.

Well, okay, two and a half years. Do you feel that any of your actions in that time contributed to the downfall of the bank a year after you left?

Mr. Tom Browne

As I said in my opening statement, you know, I'd no sense that the bank was under any stress as I was walking out the door-----

Mr. Tom Browne

-----and that's my honest view. As I was leaving I had absolutely no sense of any issue coming down the track.

In your opinion was the decision to combine the roles of finance director and chief risk officer prudent or appropriate at the time when loans ... time when loans were growing so rapidly, in terms of the need to maintain an independent risk function at the time allocation needed, albeit that both responsibilities essentially were merged into one? Do you think it was a prudent decision?

Mr. Tom Browne

And again, that was a decision which would have been taken after I departed. I don't think it was the right decision because I think given the growth of the bank at the time, I think it would have been a much better decision if there would have been an independent risk function completely dedicated to the risk activity.

Okay. Can I ask you did you see the evidence of Mr. Moran, Matt Moran, when he was in here last week?

Mr. Tom Browne

No, I didn't, no.

He stated, and I want to put a quote that he said ... gave to the inquiry. He said, with respect to Anglo, that "the lending function was excessively dominant"-----

Deputy Phelan I will let you finish and I'll stop the clock now. I'm just getting reports that there is dreadful mobile phone interference coming in proximity to you there.

Okay, well, I don't ... I don't have a mobile phone here. Where was I? "The lending function was excessively dominant in the bank and that the risk function controls were, ultimately, insufficient". What you make of that comment?

Mr. Tom Browne

Well, the lending function was always, you know, the dominant function in terms of the bank and where it came from. I wouldn't accept that the risk function didn't have, you know, it's independence, staffed up by high-quality people who had the independence to be able to, kind of, decide whether the risk is acceptable or not, and I would've always seen the risk function as being more than capable of actually calling the ... the decision in regard to whether the deal made sense or not from a risk point of view.

Finally, briefly, the FitzPatrick's tapes book by Tom Lyons and Brian Carey outlines that you had a meeting with the regulator, staff of the regulator, after the collapse of Northern Rock. Basically I want you to briefly to outline what was discussed at the meeting, and if you could, what types of issues the regulator was raising with you on behalf of Anglo, or do you remember ... do you remember that?

Mr. Tom Browne

I don't remember that meeting at all.

Okay, that's fair enough.

Thank you. Moving on, next questioner is Deputy Kieran O'Donnell. Deputy.

Thanks, Chairman. Welcome, Mr. Browne.

Mr. Tom Browne

Thank you.

NAMA estimated that there was €9 billion in interest roll-up in the loans transferred by the five banks to NAMA, and they said €3 billion of that related to Anglo. Now they ... I'm ... the document I'm referring to, Chairman, is Vol. 2 page 27. It was evidence given by Brendan McDonagh, who's the CEO of NAMA. I suppose the question really was were you aware of that level of interest roll-up in the Anglo loan book? Would those figures have been made aware to the board and senior management and dashboards on a regular basis ... management information dashboards? How was this level of risk ... increased risk monitored within the bank? And do you believe that the bank had adequate information systems to monitor this risk properly?

Mr. Tom Browne

Yes, again, when I read that I was surprised at that figure when I read it. You know, again I would have ... I would have thought-----

Can I ... can I just clarify one or two points, Mr. Browne? When in 2004 did you become managing director of lending in Ireland?

Mr. Tom Browne

It was 2005.

2005, and what date did you actually leave Anglo, because the ... what precise date did you leave Anglo?

Mr. Tom Browne

I left probably around the start ... probably the end of September, the start of October.

Because I looked at the ... at the ... the annual accounts for 2007 for Anglo, and they state ... which are dated 27 November, they state that you were shortly leaving the board.

Mr. Tom Browne

Yes, I didn't-----

That was the end of November.

Mr. Tom Browne

I didn't actually ... because we were in closed period I was effectively there until 27 November officially, but I was physically gone out of the busi----- the bank some time around ... in some time in October.

Mr. Tom Browne

So that was a technical issue in terms of, actually, on the accounts.

Okay, and the €3 billion roll-up-----

Mr. Tom Browne

Yes, again, like-----

How would that have arisen?

Mr. Tom Browne

That would have probably ... that would have come about mainly from the development loans where you would have, you know, interest ... interest roll-up would've actually been part of some of those deals, Deputy.

Was it a common feature among development loans?

Mr. Tom Browne

On land acquisition loans it would have been, you know, on the basis that you would've looked at the loan you were happy to actually, kind of, allow the roll-up on the basis of the profile or where you saw the actual project moving out-----

So, say if one of your existing clients rang you and said, "I've a land deal I want to invest in", and ... would you typically ... did you distinguish between with or without planning?

Mr. Tom Browne

Yes, again going back to the report we had, you know, the various aspects of the land in terms of it's zoned, unzoned, planning, with working capital, so very much clearly it was identified in terms of what the risk category in regard to the land loans, and land was always, you know, the risk ... the high-risk capital.

So typically you'd have given interest roll-up on land. If that developer-----

Mr. Tom Browne

Again, it'd depend who the developer was, the client was, not-----

And would you-----

Mr. Tom Browne

-----not in every case would you've given interest roll-up.

Would you allow interest roll right up to developing the site, building houses on the site?

Mr. Tom Browne

Again you may, depending on the project, depending on the location of the project, depending on the actual developer that was behind it, depending on your view of, kind of, the actual, you know, the end ... the end product in terms of its salability. So again, so every loan like that was looked at in terms of, you know-----

Did it not leave the bank very exposed to a downturn?

Mr. Tom Browne

It did, and it was always a big concern. Land was always going to be ... always the area of concern in terms of actually, kind of, loans like that, and that's why, you know, the 2006 change of policy was an attempt to try to curtail activity in that regard where we said-----

That was only for new lending. The existing clients you continued to lend to.

Mr. Tom Browne

I know and that's, as I said earlier on, that was the big mistake we made, unfortunately.

Why did you leave Anglo?

Mr. Tom Browne

I suppose why I left was, my race was probably run at that stage-----

What do you mean by your race was run?

Mr. Tom Browne

I was interviewed for the top job in 2004, which I didn't get. I decided to stay ... David Drumm asked me to stay after he'd got the job. I decided to stay and by the time 2007 came ... I'd always a desire to set up my own business. I was 45-----

Would you accept, Mr. Browne, that during your period as managing director of lending in Ireland, that was the rapid escalation in property lending within Anglo?

Mr. Tom Browne

Again, on the basis of figures it was, but I think it's on ... it was a reflection of the fact that, again, we had a very active, you know, client base in a very active market that, unfortunately, we continued to actually support-----

But it happened under your watch.

Mr. Tom Browne

We also were actually ... but it wasn't just property. We were also actually, you know, increasing our exposure to new areas of lending in terms of cash flow-type operations.

Will you expand, then, in terms of your leaving ... the reasons you left? So, you said your race was run, you went for the top job in '04. Subsequently?

Mr. Tom Browne

And then I decided I was, what, 45 years of age at that stage. I wanted to set up my own business and I felt that was the right time to do it. If I didn't do it at that stage I probably would never have done it. And that was the reason why I decided to leave.

There wasn't in any way ... like it's circumstantial that you left a relatively short time before the Patrick's Day massacre in terms of share price in Anglo.

Mr. Tom Browne

No. It was very much a personal decision.

Mr. Tom Browne

I decided to go, in terms of ... I had informed the chief executive and the chairman in April of that year that I wanted to leave and I didn't see anything coming down the tracks, as I said in my opening statement. As far as I was concerned the bank was in rude good health in ... as I was leaving. And as I said earlier on in my statement, I never ... a liquidity or solvency event was alien to me in terms of my thinking as I was leaving.

Can I just refer, very briefly, to the Anglo Irish ... Anglo Republic ... and you made reference in your opening statement that you were not made aware of the contracts for difference. You said "I was not made aware. Other directors were." I'd just refer to page 108 of it, where it's "Gary McGann, chief executive of paper and packaging group Smurfit ... and a non-executive director at Anglo, pushed the matter at a board meeting in early September." This refers to the contracts for difference. "By now the directors felt it was time to speak to [the] Quinn directly." Were you a member of the board at that time, Mr. Browne?

Mr. Tom Browne

I was, yes.

Do you remember that issue coming up at the board at that time?

Mr. Tom Browne

That issue was discussed for several months because there was rumours in the market, probably from February 2007, you know ... there was rumours in the market about what was going on. And again, Chairman, I just need to be careful here.

Well, I would ... I would encourage you to err on the side of caution, Mr. Browne, really, if-----

Mr. Tom Browne

Yes. So, it was ... it had been discussed at several meetings over a number of months because-----

Was that from February onwards?

Mr. Tom Browne

Yes, because the market was kind of ... rumours were circulating, right, and obviously that comment was on the basis of - well somebody better go and find out. Chairman, I just need to be very careful-----

Yes. Hold it there. Have you any other question that's not related to that?

Well no, it was that Mr. Browne said he wasn't made aware of it and I'm asking that ... was the board and were ye made aware of it?

Mr. Tom Browne

Again, I can't-----

Yes, I know, we're not going to go there. Thank you.

Thank you Mr. Browne. I'll now bring in Deputy McGrath.

Thank you very much Chair. Good evening, Mr. Browne. Can I start by taking you to core booklet Vol. 1, page 67? So, this is an inspection of commercial property lending activities at Anglo by the Financial Regulator in May 2007. And in the-----

That will have to be referenced off the book. I think it's -----

That's fine, yes. Mr. Browne has it anyway. Page 67, Vol. 1. So, that particular inspection by the Financial Regulator identified 30 separate issues which it required to be addressed and which it listed in a report dated 27 June 2007. Varying degrees of seriousness, I think would be fair to say, Mr. Browne, but a number of quite important issues. So, can I ask, were you made aware of this report as a board member and was it discussed by the board?

Mr. Tom Browne

Yes, you would have been made aware of that and it would have been discussed and it would have been decided what action was required to go through each item on a one-by-one basis and deal with it and report back, in terms of the actual ... the action taken in regard to that report.

Okay and would correspondence from the Financial Regulator typically have been brought before the board?

Mr. Tom Browne

Yes, something like that would have been brought before the board. And again, going back to, kind of, what I said earlier on, Deputy, my view of the board, in terms the openness and transparency, it was very much ... if there was an issue that had to be discussed, it would be brought up forthright and put before the board in terms of any issues that needed to be discussed. So, something like that, I would have said to you, would've definitely have been brought up to the board-----

Mr. Tom Browne

-----for notification, with a view to actually kind of, making sure that action was taken on the back of it.

Okay and to your recollection that wasn't the only time that correspondence from the regulator would have been included-----

Mr. Tom Browne

Yes-----

-----in the board pack and discussed.

Mr. Tom Browne

Yes, and again, and any-----

Mr. Tom Browne

The other point with that, Deputy, would've been that any time there was any interaction between the regulator and mainly through, I suppose, the finance director, that would've been ... in my view would've been brought to the attention of the board. Again, going back to the point that there was-----

Mr. Tom Browne

-----to make them completely aware on a timely basis of any issues that arose.

Sure and in respect of this particular correspondence, who was responsible for dealing with it and for ensuring that it was followed up on and the recommendations implemented?

Mr. Tom Browne

Again, it would probably be divided up between the risk function and the lending ... and lending people.

But it wasn't you?

Mr. Tom Browne

Sorry, some of it could have been within my remit and some of it would have been, probably, through the risk function. I would've said the overall responsibility for dealing with it would probably have been at the foot of the risk people supported by the lending people in terms of relevant aspects of it.

Okay. Can you recall specifically what action was taken-----

Mr. Tom Browne

I can't.

-----on foot of this?

Mr. Tom Browne

I can't recall specifically on this, Deputy.

Sure. Okay. Just an issue that was raised earlier on by Deputy Higgins ... just intrigued me. You were head of group HR for a time, is that right?

Mr. Tom Browne

When the management changes took place in ... from January 2005, I was appointed both head of Ireland and head of group HR.

January '05 until when?

Mr. Tom Browne

Until I left in 2007.

Okay. How does the head of lending Ireland also become the head of human resources?

Mr. Tom Browne

It was probably felt by the then chief executive that I was probably the best man to put together a cohesive HR policy across the group, in terms of ... he obviously felt that I had an ability to actually put together-----

Mr. Tom Browne

-----a HR policy.

Was there a HR department?

Mr. Tom Browne

There was a HR department but I went out and recruited new people into the HR department.

Mr. Tom Browne

Recruited new people into the UK-----

Mr. Tom Browne

-----but predominantly would've taken control of putting a cohesive HR policy in place.

And who reported to you in respect of HR issues?

Mr. Tom Browne

There was a ... the HR person that I actually recruited to report directly in to me here in Ireland was a gentleman called Seán Fitzpatrick. A different Seán Fitzpatrick.

A different ... and what was his position? He was-----

Mr. Tom Browne

He was director of HR-----

Mr. Tom Browne

-----reporting in to me. So he had a management ... his ... he came from a HR background.

Mr. Tom Browne

So he came in to bring, kind of a whole HR-----

Mr. Tom Browne

-----professional approach into it.

And on the other governance issue and sticking with the name Seán FitzPatrick, when he left as CEO and became chairperson of the board in 2005, you were on the board at the time. Was that a move that you supported? Was there a serious discussion on that as to whether it was the appropriate thing to do from a governance point of view - that the outgoing CEO would step straight in as chairman?

Mr. Tom Browne

Yes, I think the discussion, you know, around that issue would have been mainly taking place with the non-executive directors as opposed to the executive directors.

Was that as a sub-committee of the board or was it not the board as a collective-----

Mr. Tom Browne

No, it would have been-----

-----would have discussed that?

Mr. Tom Browne

It would've been mainly dealt with at, kind of, non-executive level rather than at executive level.

In what forum? How would that ... would they meet separately or-----

Mr. Tom Browne

Yes.

-----how would that work?

Mr. Tom Browne

Again, they would've probably met separately in regard to issues like that, in terms of nomination committee and things like that.

Right, okay. Just on the issue of exceptions to credit policy, just looking at page 3 of Vol. 2, this issue was touched on earlier on, but the reference at the very bottom of it, which basically is a summary of the aggregate of exceptions to credit policy for the period 2001 to 2008 prepared by ... by the special liquidator, as such, found that of the 1,731 cases reviewed at client level, the number found to have represented an exception to credit policy was 1,073 or 62% of clients, in volume terms, and then in value terms, the aggregate value of the exceptions identified was €31.97 billion or 92% of the value of the book which transferred to NAMA. So, I know you explained some element of that would have arisen after you left, but this was a representation of the 2001 to 2008 period. Does that match your experience in your role?

Mr. Tom Browne

No. Again, there was exceptions and, as I explained earlier on, you know, when you look at exceptions you have to go behind the individual reasons for every exception. As we saw in one of the other exhibits, you know, probably in the latter years as asset values, security values, actually kind of diminished, the bank obviously was taking a very conservative approach in terms of writing down security values-----

Mr. Tom Browne

-----and every time a loan came up for review at credit committee, if they were writing down securities by, they say 20% there, it's not surprising that actually the exception, you know, levels increased.

If we look at, like, page 13 of the same booklet, there were some changes to the credit policy in July 2005. So when we talk about exceptions to credit policy, presumably we're talking about exceptions to these type of rules which were in place about maximum loan-to-value across-----

Mr. Tom Browne

Exactly.

-----the different type of lending.

Mr. Tom Browne

Because, again, to give an example of that, you know, if the credit policy was no more than 75% loan-to-value and if through the process of approval, you know, a credit came up where it was 80% loan-to-value, it was highlighted at, you know, at the approval stage and a decision would've been taken based on the, you know, ... could be on any whole host of reasons why the loan would be approved on, you know, at an exceptional level. So, you know, somebody saying, "Well, the credit policy says 75% loan-to-value but the loan has come up at say 80% loan-to-value", so it's highlighted from the word "go" and a decision is made to approve that based on other, you know, circumstances. So it's clearly identified from the word "go" in terms of that approval. What the discussion around why you would approve it, you know, will depend on a whole range of reasons.

Sure. But, I mean, a lot of your answers on this issue and on the issue of security seems to be the case-by-case analysis, but, I mean, I have to put it to you that the basis of making a decision on a case-by-case scenario doesn't seem to have regard to what the policy was. The policy seemed to be breached on a wholesale basis, looking at the figures that we have before us.

Mr. Tom Browne

Yes. No, based on that figure, right, okay. But, you know, again, you know, if you look at that figure there which is, you know ... is you highlighted there ... you know, again it goes back to what's behind, you know, each of those loans, right. Why are they exceptions? If the bank has decided in 2008 to write down, you know, the underlying security by 20%, that, in itself, and you can see the figure there, it went from, what, 28% to 46% over the period of four or five months as a result of the bank deciding that, you know, let's kind of take a 20% haircut in the underlying value of the security, and that's why an awful lot of accounts will end up being exceptions in that situation.

Sure. That's a snapshot in 2008, but we're looking at the aggregate position-----

Mr. Tom Browne

Yes, you know, but the reality of it is, yes, I would say to you, go back to kind of, you know, the period '01, '02, '03, '04, '05. Yes, there would have been exceptions to credit policy. They would have been reported on a monthly basis, just like that report we saw there, okay, and there would have been, you know, a specific reason behind each of those exceptions, why it was an acceptable thing to do.

The point I am making is the exceptions seemed to become the norm. If the policy had to be breached that often, then either you weren't following the right policy or it was being-----

Mr. Tom Browne

Or the policy had to be changed. As you said there, in the 4th of July, the policy was changed there from 75% to 80%, you know, development finance. So, the policy was always being kind of ... was always being moved, you know, to actually-----

Policy was catching up with the practice - trying to.

Mr. Tom Browne

Yes, it could be, and reflecting the fact that market dynamics had changed and competitive pressure was out there.

I just want to clarify one thing for you there, before you conclude, Deputy, because this might want to bring you back in again, okay. Is the ... if I could ... in your witness book, there, page 67, that's ... it's the letter to the Financial Regulator, 27 June 2007. It's in Vol. 1. It won't come up. It's just I want to get a clarification on it more than anything else. You ... were you a non-executive director, Mr. Browne, yes? Were you an executive or non-executive?

Mr. Tom Browne

Executive.

Executive, okay. In ... and you haven't seen this document before, no?

Mr. Tom Browne

Sorry, the one from 2007?

You're familiar with this document.

Mr. Tom Browne

Sorry, I would ... I would've presumed I saw it back in 2007.

All right. It's just to say that in his statement in evidence Mr. Gary McGann stated that as a non-executive director he'd never seen this letter. Could you clarify whether, in your opinion, that it would've gone to the non-executive directors?

Mr. Tom Browne

I would be surprised if it didn't. That would be my understanding of it.

He said it was discussed at the board, a few months ago.

Mr. Tom Browne

That would be my ... sorry, that would've been my understanding of it, Chairman.

Mr. Tom Browne

You know, looking at that letter, my understanding is that it would have. But I can't remember it. I don't remember this document, obviously.

Mr. Tom Browne

Right. But I would have expected that letter would've gone to the board.

And Mr. McGann would have been part of the correspondence list.

Mr. Tom Browne

He would have been on the board at the time, obviously, yes.

I'm just trying to clarify that now, for sure.

Mr. Tom Browne

Yes. But, sorry, my understanding of it, you know, that that would have gone to the board.

Are you concluded then, Deputy McGrath?

Okay. Senator O'Keeffe.

Thanks, Chair. Mr. Browne, I know that you say you haven't read the Nyberg report but I'm just wondering ... they ... in the Nyberg it says that the ... it observes that the Financial Regulator raised concerns over the shortcomings in Anglo's risk function, but it isn't clear whether the risk committee or the board saw the letters relating to that. So, do you recall ever seeing that correspondence from the regulator relating to Anglo's risk function?

Mr. Tom Browne

I don't recall it at this stage, Senator.

Okay. So that means literally that - you don't remember.

Mr. Tom Browne

I don't remember. Sorry, I don't remember.

That's fine. That's fine. Broadly, what share of responsibility would you say that Anglo would shoulder for the banking crisis?

Mr. Tom Browne

You know, obviously, it shares a significant portion of the blame.

Right. Significant. Is that - you're the man with the figures - is that more or less than 50%?

Mr. Tom Browne

I think, you know, there's no hiding from the fact that it significantly attributed to the problem that arose as a result of the collapse of the property market. There's no hiding from that fact.

Okay. I have to say I am wondering, in fact, why your own statement to this inquiry is so short, Mr. Browne. It's two and a half pages long. I think it's the shortest statement we've probably received. Was there a reason why your statement is literally that short?

Mr. Tom Browne

No, I just ... I was just trying to keep it as concise as possible.

Okay. In the book, The FitzPatrick Tapes, and don't worry this is not contentious, it's an observation made by Seán FitzPatrick himself, and he was talking about how, after David Drumm had been appointed, he said well:

The bank was about lending. ... The lending guys were all about Lionel Messi. They were all strikers. They were the pop stars. They were the guys who were making the f-ing money. They didn't worry about how the money was got to give to them. As far as they were concerned they were the guys lending money and that was where it all was. That was where the culture was as well.

Now Mr. FitzPatrick, obviously - pretty much important guy in your bank. What do you think about his observation?

Mr. Tom Browne

Well, the bank was driven ... it was a lending bank, you know, that's what it was, that's what it started out as. And the treasury operations, you know, its primary responsibility was to actually fund the growth of the loan book. So it was, fundamentally, a lending bank.

Was it lending at all costs?

Mr. Tom Browne

I don't think it was. I think there was a very clear process in terms of, actually, kind of, how the whole ... you know, the whole loan approval process went and how it evolved over the years. It was very thorough, it was very complete. You know, all the management tools around management of the loan book in terms of watch lists, everything like that, you know-----

Although Mr. FitzPatrick does say they didn't worry about how the money was got to give to them. I mean, he's ... he's saying that himself about your own bank.

Mr. Tom Browne

Well, I think what he ... I think what he's referring to there is that, you know, they didn't worry about, you know ... the treasury guys, you know, as on ... on the funding side, their responsibility was to be able to go out and develop new strands of funding to be able to fund the actual growth of the ... of the loan book. And the bank, you know, in the latter ... you know, in the latter years, you know, was kind of developing, you know, its operations in the UK and in America, so suddenly you had the three, kind of, areas of geographical growth in terms of the ... yes, the loan growth in the bank.

You've said several times, Mr. Browne, that when you left the bank in September '07 that it was in - I think you used the expression - "rude health". Mr. Moran, when he gave evidence, on page 76, he was talking about how it had started. He said, "the start of the liquidity crisis or the first signal that became available in the market", that was August 2007, and then he goes on to talk about Northern Rock, which, clearly, you would be aware of. So is Mr. Moran wrong? I mean, lots of people have given evidence that, really, things started to get very tight August-September, really beginning to feel the tension by October-November, never mind then what happened when you had left. So, I'm just wondering, would you revise your view or do you-----

Mr. Tom Browne

No, because-----

So why then does the ... did the liquidity crisis start and then why was that of not ... no concern? Why do you not rate it as a concern?

Mr. Tom Browne

You know, again, going back to my comments earlier on, I didn't ... you know, I didn't get any sense that, you know, liquidity was becoming an issue as I was leaving the bank in ... in-----

But what was that about then? What was the tightening ... why is he saying that and why have plenty of other people said it?

Mr. Tom Browne

Well, I think ... I think ... I think the first people ... the first event that people, kind of, point to was Northern Rock in September 2007. That was the first, kind of, real public manifestation that there was problems starting to actually arise in the whole, you know, liquidity world. And it went from there.

Although he says August, I think Northern Rock was September, but-----

Mr. Tom Browne

Yes, September, yes. I-----

-----do you still maintain-----

Mr. Tom Browne

Yes. Yes, I would-----

-----you didn't-----

Mr. Tom Browne

I didn't have any sense in ... in ... in August, you know, of that year that there was any problems in terms of, actually ... in terms of liquidity from the bank's point of view.

You said at the start that when you came back to Anglo ... when you'd been asked to come back by Mr. FitzPatrick, that I think you returned to manage the wealth management division. Is that correct?

Mr. Tom Browne

That's correct, yes.

And so, tell us, was the wealth management division, was that high net worth individuals?

Mr. Tom Browne

Basically at the time what it was was you had probably five satellite operations, all very much independent republics in terms of, you know, Vienna, Geneva, the Isle of Man, Dublin private banking, the assurance company, and they were all very much doing their own thing. The creation of the develop ... of the ... what I was asked to do was pull together, you know, a cohesive approach in terms of those businesses in terms of creating a strategy around them in terms of growing the business, and using, kind of, some of the attributes of, say, the fund management expertise in a place like Geneva and see could it be applied in places like Dublin or London or Vienna. So it was ... they were ... they were very much independent republics in their own right before that and the idea about creating the division was to actually pull it all together and put a, kind of, a strategy around the business.

And, as I say, what did that involve though? Was it about high net worth individuals or-----

Mr. Tom Browne

Well, I ... again-----

Mr. Tom Browne

-----the profile of each individual location was completely different. You know, you go from, say, Geneva was probably high net worth individuals, to the Isle of Man, which was very much retail deposit. So each of the ... each of those operations had a very, very different clientele.

And did it involve the creation of property syndicates?

Mr. Tom Browne

Yes, it did in latter years, yes, yes.

Right. And was that something you had a hand in?

Mr. Tom Browne

I was-----

Or you were involved with rather?

Mr. Tom Browne

It was something that would have ... would have been ... would have been happening over the ... over probably from, you know, 2003-'04 onwards.

And what relationship was there then? What interface was there between that part of the business and the bank part of the business or was it utterly separate?

Mr. Tom Browne

Yes, no, it was separate and then the ... you know, the private bank ... that would have been mainly done out of Ireland, where the private bank would have gone and sourced these investment opportunities, you know, and probably in the early days was predominantly probably in the UK. Then there was probably some European opportunities brought and then latterly there was some things in America brought ... brought into the private bank.

What share of-----

Okay, time to wrap up, Senator.

What share of the profit of Anglo Irish Bank would have been contributed by that division?

Mr. Tom Browne

Senator, in the initial years when it was set up, it probably was less than 5%. It was a very small part of the bank.

Mr. Tom Browne

With ... and by pulling it all together in terms of trying to create a cohesive approach, the ambition was maybe to grow that maybe to 10% of the profits over a five-year or ten-year period.

Mr. Tom Browne

So it was ... it was always going to be a very small element of the bank.

Small but comfortable.

Mr. Tom Browne

Growing.

And, just to clarify, when you ... when you changed your job and became head of lending, Ireland, some ... that division stayed though. I take it somebody else took that job.

Mr. Tom Browne

Yes, yes, somebody else took that ... yes, exactly.

So it didn't close down.

Mr. Tom Browne

No, no. No, no.

Thank you very much. I'm going to move to wrap things up inviting Deputy Murphy to conclude, please. Sorry, my apologies, Senator D'Arcy just indicated on one point.

Yes, just very ... just two very small things, Mr. Browne.

Turn off your phone first. There's some areas there that's-----

I asked Mr. Peter Fitzgerald if he had read the book and he said he had and I asked him was it a genuine reflection-----

Please. I'm going to hold for a second, Senator, because there's terrible phone distortion there, wherever it is coming from. Okay, continue again, please.

I asked him was it a genuine reflection of the way business was transacted within Anglo Irish Bank. Can I ask your opinion on it, please?

Mr. Tom Browne

I don't ... I don't think it is.

You don't think it is.

Mr. Tom Browne

No.

Okay. And then, finally, Mr. Browne, your severance payment of €3.75 million. You left the institution; were they obliged to pay you a severance package?

Mr. Tom Browne

No, they weren't.

They weren't. And it was within their gift to do so.

Mr. Tom Browne

Yes.

Was that very generous?

Mr. Tom Browne

Yes, you know, in any man's language it was generous.

And was it the norm for people leaving who decided to leave, where there was no legal obligation to pay anything?

Mr. Tom Browne

I think the precedent had been set by, you know, two other directors who had left and ... you know, in, I think, '05 and '06.

Mr. Tom Browne

John Rowan and Tiernan O'Mahony.

And what were they paid?

Mr. Tom Browne

I think around ... roughly around the same thing. I think the figures were much the same.

Okay. Thank you very much. Deputy Murphy.

Thank you, Chairman, and thank you, Mr. Browne. Just to come back to this 2006 policy change. You decide you're going to stay with your proven clients, the big developers who've got large scale projects in Ireland and that's going to be the MO from 2006 on. And then total lending in Ireland doubles over this period of time. Were you placing too much trust in these special clients that you were sticking with from 2006? And I'm not asking you about trust in their business abilities, I'm asking about trust in their wealth, how much you perceived that they owned, their exposures in terms of their assets or what they were developing and too much trust in terms of how much they were telling you they were borrowing from others?

Mr. Tom Browne

I think ... I think, you know, I think it's an interesting word, "trust", you know, we backed them because we believed their ... of ... we believed their ability to deliver on the projects. You know, there were people that we had, kind of ... we had developed a close relationship with over ten, 15, 20-year period, and we'd seen them perform and, I suppose, the view was that if there was going to be a soft landing, you know, the people that you wanted to be in the trenches with were people that had a track record of delivering performance. And the view would have been that these were the people to actually, kind of ... to support.

So your lending was based on belief rather than based on hard data or-----

Mr. Tom Browne

No, obviously the first criteria was: did a deal make sense?

Mr. Tom Browne

You know, were you happy with the risk, were you happy with the credit risk, were you happy with, kind of, the actual proposal in terms of its ... its work-out, its repayment proposal? And then ... and then the issue was: are these the type of people you want to actually, kind of, deal with?

Were you making assumptions of their own personal wealth in terms of personal guarantees? Were you making assumptions in terms of what they might be exposed to in terms of borrowing from other banks?

Mr. Tom Browne

No, we were-----

Was any of this being backed up with paperwork in terms of-----

Mr. Tom Browne

No, we would have ... we would have looked for full visibility. We would have seen it through their annual accounts.

But did you have full visibility?

Mr. Tom Browne

In many cases we did.

Because there was an inspection done by the Financial Regulator at the end of 2007 and ... you had just left, but this relates to lending done under your period in charge. And there was a number of findings and one of the findings was that, "several show how much trust the banks were placing in the unverified assertions of their borrowers with regard to their personal wealth, and how inaccurate some of the information being used by the banks was."

It talked about management estimates of wealth, not estimates coming from the person who was selling but management sitting there, coming up with numbers but not having anything behind that other than their own impression of the borrower.

Mr. Tom Browne

Going back to my own experience, like, you know, I remember having several meetings with some of the bigger clients. When you went through detail of their exposures and their actually ... and their net worth positions, you know ... and that would have been something that I would have done on a number of occasions with some of the bigger clients.

"The inspectors noted that the institutions have been unable to obtain a Net Worth Statement from [Mr. X], as he is unwilling to disclose such details in writing. In addition, the statements provided by [Mr. Y and Mr. Z] have not been certified by a third party". So, was this happening in Anglo?

Mr. Tom Browne

Sorry, it could have happened, yes. I'm not saying it didn't happen but there would have been, kind of, you know, fairly detailed conversations around, you know, the bigger clients' exposure to other banks, the bigger clients' kind of, you know, net worth positions and verification of that information.

This inspection report found that the understanding of bank A's exposure to a developer ... another bank's exposure to the same developer was out by more than €1 billion. So I mean, how can you tell me that you had accurate understanding of their exposure to the banks and then you could be out by potentially €1 billion in this case?

Mr. Tom Browne

Again, you know, it comes back to the point in terms of actually ... you were interrogating the people in terms of getting the information. You know, there was a level of trust.

Okay, a level of trust. A big developer who you have now decided to back, you know, from 2006. Are you really going to interrogate them about their personal wealth or their exposure to other banks when they've been with the bank for so long? Would you really be able to have that relationship with them?

Mr. Tom Browne

I think you would have had to have been able to have that conversation with them. And like, and I would remember on several-----

And you would just trust the figures?

Mr. Tom Browne

Sorry, you might ... if you wanted to query it and get it backed up, you'd look for that information. But I remember having several conversations with some of the bigger developers, going through that in detail.

And what about this idea of management estimates rather than figures coming from the borrower themselves?

Mr. Tom Browne

That's not the ideal scenario but I'm not saying it didn't happen.

Okay, then that contradicts what you just said about the vigorous approach you took to getting this information.

Mr. Tom Browne

No, but some of the ... on the bigger ones, for example, I can talk personally, right. We would have sat down with them and gone through their detail in terms of their overall exposures to the banks and where their, kind of, net worth position was.

And they would have provided documentary evidence for that in every case?

Mr. Tom Browne

Sorry, you would have looked for that, yes, and-----

Would you have gotten it?

Mr. Tom Browne

Sorry, we would have gotten it. In the cases I can remember, we would have.

Thank you. Deputy Doherty, please. Wrap up.

Page 15 of Vol. 1 details the Public Accounts report of July 2012 on the crisis in the domestic banking sector and it notes:

Anglo had poor governance structures and procedures and risk controls during its period of high growth. Weaknesses in these areas were identified by auditors and regulators in 2003, 2006 and 2008. ... Management showed a lack of awareness of risk and focused their attention on business growth.

So, with that noted, Mr. Browne, how do you reconcile these comments with the positive statements on the governance structure of the bank contained in the corporate governance statements each year in the bank's annual reports?

Mr. Tom Browne

Sorry, could you repeat that question again?

The whole lot of it?

Mr. Tom Browne

The key part of it.

Okay. I'll have to start from the start because ... Do you understand what's in the PAC report in terms of the poor governance structure, the fact that the auditors and regulators identified weaknesses in these areas in 2003, 2006 and 2008, that the management, which you're part of, showed a lack of awareness of risk and focused their attention on business growth? And I'm asking you how do you reconcile those comments of the PAC's report with the positive statements on the governance structure of the bank that was contained in the corporate governance statements each year in the bank's annual reports?

Mr. Tom Browne

It, obviously contradicts it, you know. In terms of this report, you know, there's a complete contradiction.

Yes, we know that because the auditors identified ... the PAC revealed that the auditors identified weaknesses in 2003, 2006 and 2008. How come ... the point here is how come the statements of corporate governance every year in the bank's annual reports was giving you a clean bill of health basically?

Mr. Tom Browne

You know, it's actually, kind of, on the basis that they were made aware of those issues ... and they must have been made aware of, kind of, what action was being taken on the back of those reports ... they must have been happy that, kind of, whatever was being identified was being dealt with and they were happy to sign off on the basis of, kind of, their report. So they must have looked for satisfaction that something was being done in the context of the issues that had been raised.

Do you believe that the management showed a lack of awareness of risk and focused their attention on business growth?

Mr. Tom Browne

I don't on the basis of the risk function, you know, as I said, you know, in my view, was staffed up with, you know, very good lenders-----

Mr. Tom Browne

-----from both inside and outside the bank, you know, and were very much on top of raising the issues and bringing them to the attention of the respective people.

Okay. I want to refer to another book - sorry, if you just bear with me - Matt Cooper, Who Really Runs Ireland? I'm not sure if you are familiar with the book or not.

Mr. Tom Browne

Sorry, say-----

Matt Cooper's book, Who Really Runs Ireland? It's a book that he published. You're referenced or you're mentioned in the book along with Tiernan O'Mahony, both of you leaving a number of years after not being appointed to the top position. He talks about Tiernan O'Mahony writing in The Irish Times as far back as 2002, saying the big days of 40% per share profits are over and it'll be more likely to be 15% to 20%. But he mentions ... he says about you, and I will quote just for your benefit:

Browne stayed on for another three years before leaving with the same generous package as O'Mahony enjoyed. In that time, he tried to reduce the bank's exposure to the Irish property market. As far back as early 2005, he told me that it had become dangerously overheated and too dependent on tax breaks. There was limited value left for investors. However, while he had some success in reducing the bank's exposure, it continued to do new business in Irish property, both as a banker and as an investment organiser.

He goes on to talk about how Drumm wanted to prove himself FitzPatrick's equal, wanted to double the profits of the bank within five years, which he did within two. So, can I ask you is that a true reflection of your own position at that point in time in 2005? Were you trying to reduce the over-exposure to the Irish property market at that time in the bank and was there other pressures within the bank?

Mr. Tom Browne

No, it is a true reflection. I remember the conversation. I suppose the first attempt to try to do that was the change of policy in 2006. I remember the board meeting well where it was debated long and hard in regard to the policy change and the policy change was adopted by the board. You know, there was several examples where I saw this market getting seriously overheated. The policy change was an attempt to actually curtail our activity. As I said earlier on, you know, we didn't do it ... we didn't impose that policy strong enough. You know, we continued to support, you know, the bigger clients when we shouldn't have - we should have kept out - and we failed in terms of the implementation of that policy. So, from that ... so, you know, the policy that was brought to the board was the attempt to try to curtail activity and that was reflective of that comment.

Okay, thank you. With that said, I'm going to bring matters to a conclusion. Mr. Browne, is there anything you would like to add by manner of closing comments, further remarks or additional information?

Mr. Tom Browne

No, Chairman. I think my opening statement that I read sums up my view of ... and my regret in terms of what happened and I think the statement covers it in full.

Thank you very much, Mr. Browne. With that said, I'd like to thank you for your participation this evening and your co-operation with the schedule today and your engagement with the inquiry. You're now formally excused and it is proposed that the meeting is adjourned until 9 a.m. tomorrow, Thursday, 10 September, when we will conclude our final day's hearings, our public hearings, of the inquiry. Is that agreed? Agreed.

The joint committee adjourned at 9.38 p.m. until 9 a.m. on Thursday, 10 September 2015.
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