JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 16 Jun 2010

Banking System: Discussion with Anglo Irish Bank

Chairman

I welcome Mr. Alan Dukes, chairman of Anglo Irish Bank, Mr. Mike Aynsley, group chief executive, and Mr. Maarten van Eden, chief financial officer. We will receive short opening remarks followed by a question and answer session. I request that everybody ensures mobile phones are switched off as mobile phone signals interfere with the live webcasting process.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence given to this committee. If directed by the committee to cease giving evidence on a particular matter and the witnesses continue to so do, they are entitled thereafter only to a qualified privilege in respect of evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, witnesses should not criticise or make charges against any persons or entity by name or in such a way as to make him or her identifiable. Under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I propose that the lead spokespersons, Deputies Burton and O'Donnell, have 15 minutes each in which to raise questions, following which I will call on members of the committee as they indicate. Is that agreed? Agreed.

Mr. Alan Dukes

Gabhaim buíochas leis an choiste as cuireadh a thabhairt dúinn bheith anseo inniu chun na ceisteanna seo a phlé. We have prepared a brief presentation, which has been circulated to members. My colleagues and I intend to be as open as we can with the committee. However, we need to keep in mind that a significant amount of information is market sensitive, and this may restrict us in some contexts.

The bank has prepared a restructuring plan in accordance with guidance given by the European Commission. The plan has only just begun to be discussed with the Commission so, as the committee will appreciate, we will be limited in the extent to which we can comment on it.

I am accompanied by Mr. Mike Aynsley, our group chief executive, who was appointed in September 2009. He is the only executive of the bank who is a member of the board, and in that we have followed the normal procedure in State-owned companies. Mr. Aynsley has gained extensive experience in banking and financial services over a period of 30 years, having been chief risk officer in New Zealand for ANZ Bank, the national bank of New Zealand, and a global partner in banking and financial services with Deloitte Consulting. He was also general manager of global markets with the National Australia Bank.

I am also accompanied by Mr. Maarten van Eden, our chief financial officer, who was appointed to that position in January 2010. He is very dear to my heart as he is an economist by training and, like all economists, he tends to be rather argumentative. He was head of capital management in the ING Group until March 2009 and was head of the institutional client group at JP Morgan. He has also been co-head of fixed income and derivative sales at HSBC Markets in London.

As the committee will recall, the bank was taken into State ownership in January 2009. The Government said the reason for doing this was that the funding position of the bank had weakened and unacceptable practices within the bank had caused serious reputational damage at a time when overall market sentiment towards the bank was negative. At that time, the Government stated that its concerns were to protect the Irish sovereign and the Irish economy from the negative impacts that would be triggered by the bank's failure, to prevent the bank from becoming a systemic threat to the stability of the Irish banking system and to protect customer and inter-bank deposits in the group as a whole.

The key objectives of the board and management of the bank today are: to stabilise and derisk the bank; to assess and report on the actual position of the bank, in the first instance to our shareholder; to maximise recovery of all loans; to co-operate fully with all investigations into legacy issues; and to develop a business plan.

This bank has changed considerably as compared with the bank it was in September 2008 when the guarantee was introduced. Today there is a completely new board. I have been chairman of the bank since last Monday. The other members of the board are as follows: Mr. Maurice Keane, whom many members of the committee will know, former group chief executive and member of the board of directors of the Bank of Ireland and currently a director of other companies; Mr. Gary Kennedy, who was appointed to the bank in May of this year, previously group director in finance and enterprise technology at AIB Bank, a member of the board of that bank, a director of a number of other substantial companies in Ireland and who served on the board of the IDA for ten years; Mr. Noel Cawley, who was appointed in May, is currently chairman of Teagasc, a director of Bord Bia and of One Fifty One plc, previously chief executive of the Irish Dairy Board and chairman of the Irish Horse Board; and Mr. Aidan Eames, also appointed in May, a commercial lawyer and the managing partner of Eames' Solicitors in Dublin, a director of Bord Gáis and a member of the risk committee of that company. I hardly need make the point that the three appointments to the board in May have been approved by the Financial Regulator.

We also have a completely new management team in the bank. I have already referred to Mike Aynsley and Maarten van Eden. We have a new chief risk officer, Mr. Peter Rossiter, who has extensive banking experience with Citigroup. Mr. Tom Hunerson is our head of corporate development, and he has a substantial career history in corporate banking, risk management and wholesale financial services in Britain, the United States and Australia. Mr. Jim Bradley is our head of financial markets, with 30 years of wholesale banking experience and treasury and balance sheet management with Citibank, Security Pacific and National Australia Bank. Mr. Robert Cameron is our head of group balance sheet management and has previously worked at the British Financial Services Authority and National Australia Bank.

The committee will appreciate that the bank has taken seriously the clearly expressed wish at the time the guarantee was brought in that there should be major change in the boards and management of banks. No one would take it amiss if I say that there has been more change in these areas in Anglo Irish Bank than in any other bank. It is a very different animal from what it was in 2008.

The board and management take seriously the mandate the bank was given on nationalisation that our principal objective is to work for the public interest in favour of the taxpayer to minimise the cost of recovery to the Irish taxpayer and to maximise the options that will be open to the Government as we go through our restructuring plan.

Mr. Mike Aynsley

The new team is on board now and the primary objective is to address the shortcomings in the previous business model and its management activities and to place the bank back on a stable platform. As Mr. Dukes also pointed out, we have been appointed to operate in the best interests of the shareholder — the taxpayer — and this leads us in everything we are doing in Anglo Irish Bank at this point.

I will briefly review some of the areas where we have made some rapid and fundamental changes to the bank's business model in the past year. Our approach is focused on a number of key areas and among them are governance and oversight. The corporate board and committee structures have been addressed, the finance function has been addressed and risk management, in terms of credit risk, market risk and operational risk functions, has been and continues to be addressed. We continue to go through a necessary downsizing and derisking of the balance sheet in the current business.

We must also manage our business on a day-to-day basis, so we have an acute focus on the management of various asset portfolios, both those that are bound for NAMA and those that remain with the bank. Operating in a marketplace where the state of the markets is fragile both here and in Europe, we have a keen focus around the funding and liquidity aspects of the management of the bank. The other major area we are focusing on that is coming to a rapid conclusion over the next two or three months is the restructuring plan and the analysis and decision process regarding the future of the bank in the context of the restructuring plan.

We have a number of examples for the areas we have focused on. From a cost perspective, we conducted a thorough cost management initiative which has reduced the cost base by 18%, or €58 million. We have completed a voluntary redundancy plan that has reduced staff by 290. This, together with natural attrition, has been central to the reduction of staff numbers from a peak pre-nationalisation of around 1,800 to about 1,200 today, excluding the NAMA unit of the bank. Interestingly, the reduction of pre-nationalisation staff is now of the order of 800 from the peak. That is a substantial reduction, meaning that part of the process of organisation or renewal means that the natural attrition process has required us to hire around 200 people again. As Mr. Dukes pointed out, it is a different organisation from the bank before nationalisation. An organisation's culture hinges on those in it.

We have also implemented fundamentally new risk management governance and control frameworks. From a risk management perspective, we have reworked the risk management processes around credit risk. Initial focus was on that area because of the substantial exposure to the commercial real estate property markets. We have also focused on making sure that the risk processes around our market risk activities are tight. We run a large balance sheet, with significant exposures, both in capital and foreign exchange, so it is important that we made sure our risk processes are appropriate.

From a finance perspective, led by Mr. van Eden, there has been a total redesign of the finance function, a necessary focus specifically targeted at the management of capital and the management of the balance sheet generally. Importantly, initiatives that are currently under way around management information systems and loan data will allow us to open up the transparency of the organisation to new levels.

From a governance perspective, we have aligned the board committee structures and charters with best practice, as well as making sure the key management committees of the group are also operating at best practice level. We have initiated independent reviews of all our major business loans, lending activities in Ireland, the US and Britain, treasury and financial markets and all supporting and control functions, covering finance and risk areas, and operations, technology and human resource functions.

We have commenced the reduction and de-risking of the balance sheet, with analysis of the balance sheet and all activity in each market, each sector and each geographical location. We have been downsizing exposures and restructuring where possible to support improved asset quality and we have seen a reduction of discretionary treasury assets and a focus on liquidity management and funding needs.

We are fully supportive and committed to participating in NAMA and the first tranche is now complete. We are working towards the move of the second tranche later this month. We have been working on maximising recovery of loans. We have been establishing recovery units in Ireland, the UK and the USA. This is another area where we have brought in specialist expertise. We have initiatives operating around certain particular problem areas of the portfolio. Many of these have been well publicised, for example, former directors' loans and in areas where we have unacceptable large exposures to the bank, such as the exposure of the Quinn Group. These areas are under ongoing focus.

In terms of recapitalising the bank to minimum capital adequacy levels, this is a process internally led by the CFO office. This is obviously done in close consultation and co-operation with the Department of Finance, the NTMA and the Financial Regulator.

The main initiative during the past nine months has been the development of a comprehensive business plan and that process has been extremely thorough and lengthy and I will discuss this further shortly. Before I give members a brief overview of the restructuring plan initiative, I will hand over to my colleague, Maarten van Eden, chief financial officer, who will cover off on two areas, the results as at the end of last year. It is probably worthwhile to go through the position with regard to the current capital situation and expectations of the group.

Mr. Maarten van Eden

One of the very first things I had to focus on when I came on board in January was writing and publishing the annual report that was issued at the end of March. It makes horrendous reading. I have tried to lay out the facts as comprehensively as I could. The key part of the annual review was the impairment review that was done in a full dress exercise across the loan book, starting in December under the direction of the chief risk officer, which extended into January, when I arrived.

The main number that comes out of that is a €15 billion impairment figure on the loan book of about €72 billion. Of that sum, just over €10 billion of impaired loans relate to loans that are destined to go into NAMA. At the end of last year, we had taken 28% impairment on average on the €35.6 billion of loans that are destined for the NAMA portfolio. We did make money as Anglo Irish Bank during 2009 in a very limited way and we added to our income through a liability management exercise that was conducted in the summer of 2009, where we bought back subordinated debt at a significant discount to par which led to a book profit in the accounts of €1.8 billion.

We had to focus in view of this significant impairment figure of course, on the recapitalisation of the bank because without capital adequacy a bank cannot continue to function. We worked closely with the Department of Finance to get the capitalisation on board, which in the first instance was €8.3 billion. I would very much like to tell members that all the pain has been taken, but that is not possible because the market has not stabilised and impairments are materialising in the loan book as we go on. On top of that we now have a better understanding of what the discount will be on loans going into the NAMA portfolio. If we look at the discounts on the first tranche of loans that have gone into NAMA, that discount is about 55% of the nominal €35.6 billion. The first tranche was only €9.3 billion but further tranches will go across in the remainder of this year. If the discount on the loans going into NAMA is similar to the discount in the first tranche, one can calculate the difference between the impairment number that we had of 28% and 55% which is the discount applied by NAMA, and one can see a further major loss on the €35.6 billion, which must be faced up to. That figure could be as high as €9.5 billion. That is just the loans going to the NAMA portfolio.

The non-NAMA loans will face further impairments this year, but as members have seen in the 2009 accounts, the losses are more modest, but still very large compared with what one would expect to see in a banking portfolio. That is what it is. This has been caused by highly leveraged lending to the commercial property sector and the commercial property index is down by more than 50%. If there is little equity in the structure, then the losses in property prices will transfer into losses on the loans. I would also like to point out that the distress of Anglo Irish Bank is a reflection of the distress of many corporate counterparts we have. As we see it, our primary duty is to work with our counterparts to see what can be remedied in this very difficult situation.

The capital requirements, as I have pointed out, will need to increase. Members know that we have drawn down €4 billion in 2009 and €8.3 billion in the form of a promissory note at year end. We increased the capitalisation again by €2 billion at the end of May and we anticipate at this point in time in a highly uncertain market that the capital requirement for the bank will increase by another €8 billion to give that €10 billion figure that the Minister for Finance has mentioned in the House. The markets continue to be uncertain but since he spoke at the end of March, our view of the near future has not changed significantly.

Mr. Mike Aynsley

It is very clear where we are at this point in time. Everybody knows that we went through a process late last year of submitting a restructuring plan to the European Commission. The Commission came back in December and put all sorts of questions, many of them very simple but others requiring more analysis. The Commission gave us some further information and direction on the structure and the way it wished us to present the information. Then there was another series of questions that have required us, through the Department, to enter into a dialogue with the Commission. In the process of reworking the plan, it was decided that the best way of addressing this was to come up with a mark II version of the plan, which we have been working on from January through to the end of May, when we submitted it.

Members will be aware that a key condition of the EU approval for the provision of state aid, is that we need to submit the restructuring plan. It must address three main issues: it must demonstrate minimisation of state aid; create exit options for the Government; and minimise negative systemic effects. The process, which is also the subject of a stringent framework from the Commission, is one of examining all alternatives, from liquidation through to the operation of the bank as a going concern in one form or another.

Over the last few months we have conducted detailed and extensive analysis of each area — liquidation over a shorter and a longer period, up to 12 months, or winding the bank down over a five-year period, a ten-year or a 20-year scenario. We looked at the stabilisation of the whole bank and it continuing to operate in some form as a going concern and at other initiatives that are defined as far-reaching restructurings by the Commission that would result in a scenario where the bank is split into a good bank, bad bank structure or a good bank, asset run-down structure.

The alternative liquidation through wind-down option was discounted on the basis of capital cost and the cost of funding these initiatives from a State perspective. It gets back to the fundamental approach Mr. Dukes spoke about, where everything we do is informed by the cost to the shareholder and, therefore, the cost to the taxpayer. When we arrived at the alternative of the split bank it was from the perspective of the minimisation of state aid, minimisation of funding, creation of an option that provides some possibility of recovery through sale of the good entity back to the private sector at a later date and an option that minimises the systemic impact that we would see in either a liquidation or wind-down scenario around both the liquidity or liability sides of the balance sheet but also around the assets side of the balance sheet.

There are other areas that will be the subject of discussions but I want to cover the investigations. We are co-operating fully wherever we can with all of the investigating bodies. We have an internal team that is focused on co-ordinating the needs of the bank in terms of providing the investigating teams with the information they need. Clearly, these investigations are ongoing so we are limited in what we can say about them. It is worth saying about the recent coverage of privilege matters that our approach has been one of operating in the interests of the shareholder and the taxpayer and privilege from our perspective has been designed to focus not on the protection of individuals but on the protection of the bank's privilege to ensure that we protect the taxpayer to the greatest possible extent.

We appreciate the support that has been given to the organisation by the Minister. We are determined to pursue those who owe the bank money for every red cent. We will continue to do that and to act to protect the interests of the Irish taxpayer in everything we do.

Chairman

I thank the delegation for the presentation. We will now ask questions.

Deputy Kieran O’Donnell

I welcome the delegation to the committee. On the issue of legal privilege, the ordinary person sees a State bank that has received €14 billion to date of his money and that is under investigation. We need to know the truth. Mr. Paul Appleby has been appointed as a State officer by the Government, and he is also being paid by the taxpayer. Why can he not get access to the information he needs? Why are barriers being erected? An explanation was given in the presentation but it was legalistic so we would like to hear it in layman's terms.

The loans were mentioned, the €10 billion was mentioned, with sums of €2 billion and a further €8 billion on top under the promissory notes. The €10 billion was effectively the additional write down on the loans going into NAMA over and above the 28% the bank provided in the accounts and the 55% if we extrapolate the first tranche going into NAMA from Anglo Irish Bank. On the balance of the loans, if I am right, the bank provided a 14% write down. I am basing that on the €15 billion in total of the 72 loans in the loan book, with €10 billion in respect of NAMA loans amounting to €35.6 billion. So to approximate simply we are talking about another €35 billion, with €5 billion of that being the balance of the €15 billion.

Mr. Maarten van Eden

The rest is €4.8 billion on €36.5 billion.

Deputy Kieran O’Donnell

On that €36.5 billion of loans that are left in the Anglo Irish Bank loan book, what provisions will be required? Are they generating cash and, if so, how much? How much is rolled up interest? Is there an agreement for further rolled up interest? Has the bank lent any money since it was nationalised?

Mr. Maarten van Eden

No.

Deputy Kieran O’Donnell

Not a red cent?

Mr. Maarten van Eden

No.

Mr. Alan Dukes

Not to new clients.

Mr. Maarten van Eden

Only to protect our position.

Deputy Kieran O’Donnell

To protect the bank's position in respect of existing loans? Are we talking about existing loans or about rolled up interest?

Mr. Alan Dukes

With existing clients. We are specifically forbidden by the terms of the refinancing agreement from doing any business with new clients but where the bank believes it to be in the interest of the working out of a relationship with a customer to advance further funds to mature a project——

Deputy Kieran O’Donnell

How much has been advanced since the bank was nationalised in that fashion? How much has been put in on top of the €72 billion of loans?

Mr. Maarten van Eden

It is marginal, it is in the hundreds of millions of euro.

Deputy Kieran O’Donnell

To the man in that street, that is an awful lot of money and it is taxpayers' money.

Mr. Maarten van Eden

On a loan book of €72.1 billion, it is not a lot.

Deputy Kieran O’Donnell

Materiality is relative but in the context of representing people who are losing their jobs, the delegation will appreciate——

Mr. Maarten van Eden

So people have an idea what we are talking about when extending further funds to a relationship, I will give an example. A hotel has been lent money. Obviously things are going badly, fewer tourists are staying in hotels. A loan like that can be closed down by seizing the property and discontinuing the business, or the hotel can continue to pay the salaries of staff in the hope the tide will turn and things will improve. If there is good management in place and there is a business case, it may make sense to extend further credit temporarily rather than cut all the prospects of an upside.

Deputy Kieran O’Donnell

The European Commission is investigating the future of Anglo Irish Bank. The €2 billion brings us to the absolute limit of the amount the Commission will allow to go into Anglo Irish Bank at this time.

Mr. Maarten van Eden

Up until the end of May.

Deputy Kieran O’Donnell

Up until the end of May. With the restructuring of Anglo Irish Bank coming forward, reference was made to the options. Can the witnesses put values on the cost of liquidation over 12 months, wind-down over ten years, wind-down over 20 years, stabilisation of Anglo Irish Bank, splitting into the good bank-bad bank and indicate the global figures? How do they expect to get money back for the taxpayer if €22 billion goes into it? The annual budget for the Department of Education and Skills is approximately €8 billion. The €22 billion is twice the budget for the Department of Education and Skills with €6 billion change, and more or less the budget for the Department of Justice, Equality and Law Reform. The amounts are astronomical.

Mr. Maarten van Eden

I agree.

Deputy Kieran O’Donnell

The ordinary person is looking at a bank that has been nationalised and that has a chequered history prior to the witnesses taking over. Already €14 billion has gone into the bank and it is seeking, possibly, another €8 billion? When will the taxpayer see a red cent of that?

Mr. Mike Aynsley

I think it needs to be said that in addition to the funds that have gone in, we are talking about an estimate of another €10 billion going in which is the impact of the impairments——

Deputy Kieran O’Donnell

Some €2 billion has already gone in.

Mr. Mike Aynsley

So we are talking in the order of €22 billion. It needs to be said that the lion's share of this will never be seen again.

Deputy Kieran O’Donnell

How much of it will never be seen again?

Mr. Mike Aynsley

We are going to set about the establishment of a new bank with roughly €2.5 billion of capital.

Deputy Kieran O’Donnell

Some €2.5 billion. So Mr. Aynsley is saying that more or less €20 billion is gone down the toilet. It is gone.

Mr. Mike Aynsley

Do not lose sight of the fact that what we are doing here — bear in mind we were brought in to solve HR problems — is complex and it is very difficult.

Deputy Kieran O’Donnell

It is costly to the taxpayer.

Mr. Mike Aynsley

It is costly. One needs to look at what is driving this and it is a dislocation of some 50% in the commercial property real estate market. These are assets that people bought and the value of them has dropped by 50%. They leave the purchasers of these assets with very substantial amounts of debt that they cannot repay. That money is essentially gone. When we transfer loans at 55% discount to NAMA that money is gone. It is a loss. It is not recoverable. It is like hoping, for example——

Deputy Kieran O’Donnell

But the €22 billion is outside the NAMA loans.

Mr. Mike Aynsley

The €22 billion includes the loss on the NAMA loans.

Deputy Kieran O’Donnell

Yes, but internally.

Mr. Mike Aynsley

That is the point. Those lines, for example, are gone, €36 billion. Roughly 50% of that value is gone because they have been sold at 50% of their value, so that money will never be recovered.

Deputy Kieran O’Donnell

Given that €8 billion has not yet gone into Anglo, there is an opportunity cost. Given that €14 billion has gone into Anglo that will never see the light of day, at this moment, if one was to wind down Anglo Irish Bank in an orderly fashion over a period——

Mr. Maarten van Eden

That money would still have to go in.

Mr. Mike Aynsley

Understand the timing issue on this. We have loans of roughly €26 billion that have not yet gone into NAMA on which we have taken a 28% haircut. We know that we are going to take a 50% to 55% haircut on those. There is a very substantial lump already gone of the remainder of that €8 billion. This value, by virtue of the fact that the property market has fallen by 50%, reflects through in the value of the loans and the impairments. This money is gone. It is not a matter of saying if it is closed down one limits and saves the possibility of losing the money. The money is gone.

Deputy Kieran O’Donnell

So Mr. Aynsley is saying the €8 billion, regardless of any route taken at this moment in time, exacerbates——

Mr. Maarten van Eden

Exactly, and by winding it down sooner rather than later, would only make it worse.

Mr. Alan Dukes

The sooner one sells the assets the more one will sell them into a weak market. There is not a costless way of doing this. This is not a way of stopping the operation that will stop these vast sums of money being lost. The issue is whether there is a formula or a path under which one can create out of the carcass of the previous entity, an entity that can add value and that can produce something worthwhile. That is what our restructuring plan is designed to do.

Deputy Kieran O’Donnell

In essence, €2.5 billion is being put into the setting up of a good bank.

Mr. Alan Dukes

Yes.

Deputy Kieran O’Donnell

We have a different view on Anglo Irish Bank. We feel that when Anglo Irish Bank was being taken in, certainly professional investors, bondholders, who took some hit, should have taken a larger hit. If the bank was to be wound down now in an orderly fashion, would the €2.5 billion be saved?

Mr. Alan Dukes

No.

Deputy Kieran O’Donnell

Why not?

Mr. Alan Dukes

The basic logic of what we are proposing is very straightforward. In a wind-down operation, one is talking about losing all the way, no matter how short or how long the period. In a wind-down one will lose, unless some miracle happened and property markets recovered within the wind-down period.

Deputy Kieran O’Donnell

Is it not fair to say——

Mr. Alan Dukes

Let me just make the point. In a wind-down situation one is talking about loss all the way. In the formula we are putting forward, which is our preferred option, we are taking some of those losses. In fact we are taking all of those losses but we are creating an entity that can generate a profitable activity. The proposal is that in having an entity like that generating a profitable activity one builds value that can subsequently be realised to the benefit of the taxpayer.

Deputy Kieran O’Donnell

Are the witnesses in negotiations——

Mr. Alan Dukes

There is no way we can say that within any kind of conceivable foreseeable time period that entity would earn enough to offset all of the losses that have gone into it up to then but it does create the possibility and an instrument to add value which gives the Government, the shareholder, and the taxpayer some options for recovering some value at a future date.

Deputy Kieran O’Donnell

I will finish on this point because I have to leave. Is it not a fair comment to make that when Anglo Irish Bank was taken in — I appreciate that is outside the remit of the witnesses — there was a significant amount of extra losses that the bondholders, the professional investors to the ordinary man looking in, could have taken which the taxpayer has ended up taking?

Mr. Alan Dukes

That is a different discussion.

Deputy Kieran O’Donnell

Yes.

Mr. Alan Dukes

That might have been a relevant discussion in September 2008 and Deputy O'Donnell and his colleagues came down on a particular side in that discussion.

Deputy Kieran O’Donnell

And the witnesses will follow the good flight path.

Mr. Alan Dukes

Rightly, I think. The Dáil made a decision to give the guarantee that was given. In terms of that discussion, we in the bank are policy takers, we are not policy makers. We work with the instruments we have been given on the problem that we have been presented with.

Deputy Kieran O’Donnell

And Mr. Dukes would understand both sides——

Chairman

Let Mr. Dukes finish.

Deputy Kieran O’Donnell

Sorry.

Mr. Alan Dukes

I try. As the Deputy is aware I try to be broad-minded about these things. In the situation in which we find ourselves, our objective is to find a way of working through that and out of that problem at the least cost to the taxpayer. Our preferred option — we have spent a lot of time and a great deal of effort has gone into several iterations of this — is a path that gives us an entity at the end of the plan that can produce value and give us some means of getting value back for the taxpayer that is not present in any of the other options.

Deputy Kieran O’Donnell

Can Mr. Dukes quantify that value?

Mr. Alan Dukes

I would have to be very honest and say that to quantify that value now would be taking a punt.

Deputy Kieran O’Donnell

Could Mr. Dukes take a punt?

Mr. Alan Dukes

No, I do not think so, but our hope would be that within a reasonable period, after it is split into a good bank-bad bank, we will have a good bank model with a sound business model that can play a constructive part in the economy and be profitable. There are many options that we can think of after that. There is going to be some substantial structural change in the Irish banking system. I do not have any better insight into it than anybody else.

Deputy Kieran O’Donnell

Would Mr. Dukes see himself having——

Mr. Alan Dukes

I certainly think that a viable business unit that conforms to the kind of criteria the Commission has told us to use would be a useful part of that restructuring.

Deputy Kieran O’Donnell

Do the witnesses see Anglo as being part of another third force and are they in negotiation with, say, the Quinn Group in terms of possible business opportunities in that area?

Mr. Alan Dukes

The discussions with the Quinn Group have a completely different objective and they are not part of this process. I am reluctant even to use the term "third force" but certainly, the kind of bank we plan to build would be a viable part of a restructured Irish banking system down the line.

Deputy Kieran O’Donnell

With a commercial entity?

Mr. Alan Dukes

Yes.

Deputy Joan Burton

It is unfortunate that we do not have any schedule of the figures mentioned by the delegation as it would have helped the committee. The only figure mentioned is €22 billion. Given what Mr. Dukes has said in response, is the €22 billion likely to be the final amount, as he made two references?

I ask the delegation to tell the committee about the process of transferring loans to NAMA. The discount on the transfers has been much higher than referred to on previous visits to the committee. The new chairman of the bank suggested that the discount was unlikely to be more than 30%. There was a lot of speculation by stockbrokers and others that it might be between 20% and 30%. Now that the discount has gone well over the 50% mark and the bank is through dealing with some of the bigger developers, NAMA has reported that the process of valuation has been a nightmare and the discounts have been enormous because in many cases valuations attributed included large amounts of rolled up interest and other items which were never going to be recoverable. It has been the case of 100% write-off for a proportion of the loans because no paperwork exists to support the ownership of the loan. Can the delegation quantify at this point how much of the portfolio which the bank had earmarked for transfer to NAMA is likely to be non-transferable because of bad paperwork, inadequate legal potential title and the fact that the fall in the asset values is far higher than the average value reduction? Can the delegation quantify this amount? I presume the bank has held onto those loans because NAMA would not take them.

With regard to the loans under €5 million — NAMA has referred to them at hearings here — the general understanding is that the loans under €5 million relate to people who came late, perhaps, to the property game. Some of those loans are more likely to be in development land and in many cases, discounts on development lands would be 75% to 80% because it was so speculative. Has the delegation a number on what would be the reduction in that kind of loan portfolio, those under €5 million, which is not transferable to NAMA? Has the bank factored this into the figures which it has given the committee today?

The bank also has ordinary commercial customers and I presume these are also property-related. I presume some of their businesses are also in difficulty. It is the case that developers have transferred a lot of material but in some cases, they still have material with the bank. Am I to understand from Mr. van Eden that the top 50 will not have anything left with the bank? That clarifies the situation. How does the bank intend to manage the relationship with those people? What is their income capacity if, for instance, they had bought two fields on the outskirts of Dublin West or the outskirts of Longford or any Irish town or the edge of a city? How can they hope to service those loans unless there are personal guarantees for supplying a flow of income?

With regard to the non-property debtors, the most well-known is the Quinn Group and its debts arising from the speculation in the bank's shares and the contracts for difference. How many other debtors — presumably not of the same magnitude — have debts similar to the Quinn Group debt, where the debt level is very high? They may not be involved in property but due to the general collapse in Ireland, such people may be under water and unable to service the debt.

Mr. Maarten van Eden

I suggest I could intervene at this point and give the Deputy some answers.

Deputy Joan Burton

Thank you.

Mr. Maarten van Eden

The €35.6 billion that has been earmarked to go across to NAMA is going across. NAMA is not saying it will not take it. There has been negotiation with NAMA about what loans should be going into NAMA and what loans should not go because NAMA is also taking good loans. The point about the transfer into NAMA is that NAMA likes to have the whole relationship; it does not want part of a relationship to be left in the bank and part of it to be with NAMA. The rule is that if there is a significant amount of land and development lending to a particular client then that client goes into NAMA with all the loans that the entity has with that counter party.

Deputy Joan Burton

Is the discount on some elements in the parcel to be 70%, 80% or 90%?

Mr. Maarten van Eden

I can give the Deputy a little insight into the first €9.3 billion that went across into NAMA in early May. It is a huge range of material. Some of the valuations are at par, some of them are at zero and the average discount was 55%.

Deputy Joan Burton

How much was at zero?

Mr. Maarten van Eden

The amount of loans that were legally impaired was negligible. If the Deputy wishes the numbers, it was around 1%.

Deputy Joan Burton

How many were at zero valuation?

Mr. Maarten van Eden

It was about 6%.

Deputy Joan Burton

That is pretty shocking.

Mr. Maarten van Eden

Yes, it is. However, there is an enormous diversity in the loans that are transferring to NAMA but the general picture is extremely shocking. The small loans in land and development lending in the Anglo portfolio, are minimal.

Deputy Joan Burton

What is minimal? We have just heard that a couple of hundred million euro was not much. My idea of minimal may be different to that of the bank.

Mr. Maarten van Eden

It is minimal. I can supply the Deputy with the exact number.

Deputy Joan Burton

Is it €10 million, €20 million or €100 million?

Mr. Maarten van Eden

It is in the region of €100 million. It is small.

Deputy Joan Burton

I do not think that is minimal. I know it may be to international bankers.

Mr. Maarten van Eden

It is maybe a couple of hundred million euro but on €35.6 billion of total land and development lending, to our way of thinking, and please excuse me, that is small. It is an issue for other financial institutions but much less so for Anglo Irish Bank.

Mr. Mike Aynsley

With regard to those loans under €5 million which the bank has put over to NAMA, the amount is €36.5 million. For example, considering the level of loans going over from AIB, Anglo Irish has roughly the same level of overall commercial real estate property exposure. The reason AIB is not putting more over to NAMA is because it has a lot of exposure compared with Anglo in loans under €5 million and which are not eligible for NAMA.

Deputy Joan Burton

Are the loans under €5 million mostly developments such as hotels?

Mr. Mike Aynsley

The loans under €5 million could be land and development lending to smaller clients. It could be anyone. It could be individuals.

Mr. Alan Dukes

Deputy Burton is concerned about what is minimal and what is not. The fact that what is a very small proportion of a very large loan book is the inevitable outcome of the splurge of lending that went on over such a long period. Unfortunately, that is the reason for the size of the problem we have. The fact that we could say that something is minimal when it amounts to several tens or even hundreds of millions of euro in this overall context is simply a reflection of the madness that went on over such a long period. Unfortunately that is the measure of the problem, or the part of the problem that it is our job to try to work out. When we say "minimal", we are not saying that these amounts of money are not important. Of course they are.

Deputy Joan Burton

I appreciate that.

Mr. Alan Dukes

It is in the context of the overall problem with which we are dealing.

Mr. Mike Aynsley

They are very important. It is frightening to talk about this. One talks about loans going over zero, 6% is a significant amount. One can look at those loans, for example, it might have been a loan that was guaranteed by a high net worth individual, and the security was the guarantee. The high net worth individual is no longer the high net worth individual.

Deputy Joan Burton

May I be more precise in what I am leading up to? Mr. Aynsley is basically saying that he sent this very big parcel with a pink ribbon around it over to NAMA and that it has taken this €36.5 billion parcel of loans. He is then saying he is left with a slimmed down bank with a great deal of public money put into the bucket, but still within the slimmed down bank, he has another parcel that is also rotten and that he needs NAMA Anglo or Anglo NAMA mark II. For the benefit of members will Mr. Aynsley give an indication of what he believes will be in the NAMA Anglo mark II parcel as opposed to what might be? I can see that Anglo Irish Bank has a deposit book and various other assets that presumably are salable at any time once reconfiguration happens. All can see that. We are really interested in the extent of the bad loans in the second parcel

Mr. Mike Aynsley

Let me try and bring some clarity to that. First, it is very important to distinguish between a bad loan and a bad asset. There are many good assets in this country that have been over-levered and there will be a process that goes on where these assets will end up being owned by other parties. Many of the assets that underpin and are the security against some of the loans that will go over into what we are calling the bad bank or the asset run-down company are actually good assets that will be worked out over time. Having said that, the numbers look something like, out of the overall portfolio, pre-nationalisation, close to €85 billion.

Mr. Maarten van Eden

That figure of €85 billion is the total balance sheet, and the figure for loans is €72 billion.

Mr. Mike Aynsley

The loan component will be between €13 billion and €15 billion only in the good banking entity, the new bank. The residual loan portfolio will go into the asset run-down company and that will be in the order of €20 billion——

Deputy Joan Burton

Is it €20 billion of more bad loans?

Mr. Mike Aynsley

----which is currently written down to something in the region of €13.5 billion of current transfer values.

Deputy Joan Burton

Is Mr. Aynsley suggesting that the final run on the bad stuff in Anglo is going over €100 billion, between the initial €80 billion plus in terms of NAMA?

Mr. Mike Aynsley

The total figure is €72 billion. Of that figure, €36 billion goes to NAMA and we have roughly €36 billion left, which is half and half and of the €36 billion that is left roughly €15 billion will be sitting in the new banking entity, with a residual in the asset run-down company. That is the extent of the damage that has been done because of the dislocation in the markets and the poor quality of the loan portfolio.

Deputy Joan Burton

In regard to Anglo NAMA mark II, is it not likely that the discount levels on that would be really high and as the only recourse is to the State, other than selling what the chairman of Anglo Irish Bank has described as a deposit book and other such items, surely the discounts and the write downs on that would be very severe?

Mr. Mike Aynsley

My colleague, Maarten van Eden, might like to go through the provisioning numbers around that portfolio, but it is largely provided for within the constraints of the overall €22 billion we are talking about. We will end up with an asset run-down company of——

Mr. Maarten van Eden

It is very important to understand that today, we work in a very disciplined way so we do a formal impairment review twice a year and we are about to embark on one now at the end of June. We have ongoing asset quality reviews, so we have the whole bank focused on the quality of the loan portfolio. We had to do that, in any case, as a normal diligent bank, but we had to do it as well in the context of the restructuring plan. We had to look at the quality of our loan book. We do not lead or lag with our impairment process. We take the impairments when we see them. It is not as if we sit around the camp fire and say "Let us assume that it will get worse down the road and take extra provision". IFRS do not allow one to do that. IFRS impairment testing is something that has been extremely narrowly defined and one has to follow the rules and do it by the book.

One looks at the loans, on a loan-by-loan basis and does a review and one has to have objective evidence of impairment. Then one does a cashflow analysis and determines whether the present value of expected cashflows is less than the loan or not. Then one takes an impairment. That is the methodology we use. We do not anticipate future events. We do not have an outlook on the property market. It is today's assessment of the quality of the portfolio. In that context, of course, when we look at the loans ourselves from a business point of view we try to see not only the value of the collateral, but also the financial condition of the client who has borrowed the money. He may have other sources of funds, in addition to the value of the collateral, he may have cashflow, net worth from other sources. One has to look at the whole picture, when one is assessing the quality of the loan.

Deputy Joan Burton

I accept that. Is Mr. van Eden saying that the IFRS allows the bank to take write-downs in a very narrow field because of the way the rules operate? Is he saying that he cannot do general provisioning for expected levels of bad debt? The chairman said that the property market might reflate a bit, and that would give everybody a break.

Mr. Alan Dukes

I said, barring a miracle.

Deputy Joan Burton

Yes, Mr. Dukes said barring a miracle. In fact all the experience with the bank, I accept that the witnesses have come on board more recently, is that everything has turned out to be much worse.

Mr. Maarten van Eden

That is because the market has been continuing to fall in price. Between March 2009 and December 2009, the commercial property index fell by more than 20%. It is like taking a bearing when one is sailing and moving very fast. Trying to take stock of where one is when moving very rapidly and things are changing is very difficult. It is a matter of judgment and one does one's best. One cannot say the market is falling and therefore one can anticipate that it will fall another 25% or 30% and base the impairment testing on that expectation. One is not allowed to do that.

Deputy Joan Burton

I know that.

Mr. Maarten van Eden

One has to look at the market as it is at the date of the balance sheet.

Deputy Joan Burton

Could Mr. van Eden discuss how the debt of the Quinn Group fits into that?

Chairman

The Deputy may come back to that issue in her second tranche of questions.

Deputy Michael McGrath

I welcome Mr. Dukes, Mr. Aynsley and Mr. van Eden. They have an unenviable task, having inherited a mess of gargantuan proportions. The scale of the black hole in Anglo Irish Bank is truly mind-boggling for the people we represent. The estimated cost to the taxpayer stands at €22 billion and people will be infuriated to think it was largely avoidable, had a sensible business model been adopted and implemented by the bank.

How would Mr. Aynsley characterise the way he found the bank when he first came on board? What was the culture under the leadership of Mr. FitzPatrick? What were the practices and how were lending decisions made? Can he comment on the lack of proper risk assessment?

The presentation outlined five strategic options for the future of the bank and the executive has come down on the side of splitting the bank into a good bank and an asset recovery company. The popular feeling seems to be that it is a dead bank and that we should stop putting taxpayers' money into it and shut it down. What analysis has been carried out into the five options? Can Mr. Aynsley say what the net cost would be for each option? I understand he will not be able to quantify the systemic risk and the implications of allowing Anglo Irish Bank to go under but to what extent has the assessment of these options been independently validated? Who carried out the assessment and who scrutinised it?

Mr. Aynsley referred to work-out units and said there were efforts to recover as much of the debt as possible. Can he say to what lengths the bank is going to recover those loans? There have been various media reports of deals being done with individual lenders in which loans or parts of loans were being written off. Can Mr. Aynsley confirm or deny whether that is the case? Will personal guarantees be invoked where appropriate?

As for the overall cost, it frightens me a little to hear Mr. Aynsley say the figure of €22 billion is based on current expectations. What are the variables that might change that? The 55% NAMA discount is known for tranche 1 and has been factored into the estimated figure, accounting for half of the loan book. Is the main variable the quality of the remainder of the loan book? Mr. Aynsley discussed the extent to which the bank was allowed to make provisions under accepted accounting standards but what is the overall provision on the books of Anglo Irish Bank for the remainder of the loan book, the non-NAMA loans totalling €36 billion? Is that provision adequate?

Mr. Mike Aynsley

I was asked what I thought when I came on board in September 2009. I had missed the activities which took place in the first part of the year and it was the dying days of the old regime. I am asked this question regularly and there are many answers. I am surprised and shocked at many of the things that have happened in the organisation. When I arrived, a tremendous amount of work had been put in by Mr. Donal O'Connor and the new board, including the newly-appointed public interest directors. He had put in place a new interim leadership team, which I took over, and I was impressed by a lot of the initiatives I saw.

I am not sure if the Deputy wants me to go back over the past but there is not much point at this stage because it has all been said. We know the governance was poor and management inappropriate but I think it is better to focus on where we are going. The decision to split the bank was the culmination of a piece of work that had begun by looking at the possibility of liquidating the bank. It was a very thorough process.

Our team of 2009 was supplemented at the beginning of 2010. It was a large team, peaking at approximately 50 people recruited from numerous organisations to look at all the numbers. For our strategy, we used Bain and Company from the UK, not simply because it was a high-powered strategy company but because of its track record. It had had specific involvement in developing restructuring plans for banks on behalf of the European Commission and was heavily involved in putting a plan together for the purposes of splitting Northern Rock. We used JP Morgan, PricewaterhouseCoopers and other independent validation firms such as Rothschild. On the legal side we used McCann FitzGerald and Freshfields to deal with complex parts of the analysis project.

By the time we got to the end of the process, we were confident that it had been dealt with thoroughly, subject to the assumptions one has to make. We are dealing with markets and markets keep on moving but one can only deal with one set of macroeconomic variables. The process includes base and stress cases and the figure of €22 billion does not change, whatever the scenario. It is better, however, under the scenario in which the bank is split because it allows for a payback through the sale to realise some enterprise value from the good banking entity which emerges. That would not be realised under any of the other scenarios so it is the only one which offers any payback to the taxpayer. In the wind-down or liquidation scenario the money is gone and the black hole remains a black hole.

Deputy Michael McGrath

Is the black hole bigger in those scenarios?

Mr. Mike Aynsley

Yes. If a person had to sell a house by the end of the week it would be madness to expect the best price for it.

Senator Shane Ross

How does one know it will not be lower?

Deputy Michael McGrath

If the Government made a decision tomorrow to shut down Anglo Irish Bank, what is the estimate of what the cost would be?

Mr. Mike Aynsley

If it decides to shut it down it must also ask what the timeframe would be. It is the same as deciding whether to sell one's house at the end of the week or to market it more slowly over a five-year or ten-year period. Immediate liquidation would create a higher cost than winding the bank down over a ten-year period.

Mr. Maarten van Eden

The short answer is that, in a short liquidation, there would be incremental losses over and above the €22 billion, to the tune of an extra €20 billion.

Deputy Michael McGrath

So to shut it down over the period would bring about a net hit of approximately €42 billion.

Mr. Maarten van Eden

Yes.

Deputy Michael McGrath

The longer the wind-down period, the more the figure reduces.

Mr. Maarten van Eden

The problem with a wind-down over an extended period of time is that there is, to an extent, a trade-off. There are compensating factors between the loss one takes and the time one has to fund. In the dynamics of the balance sheet, if one unwinds liabilities, the funding we have is short and if we take a long time to sell an asset we may hope for a better price so the loss will be less. We would still have to fund the difference between when the liabilities become due and when we can sell the asset. That difference must still be funded over an extended period.

It is not only the loss we must think about, we must also consider the funding implication for the State. Those are the two equations when the funding is temporary. If a liability comes due tomorrow but the day after I can sell all my assets at the price in my book, then I only have to bridge one day of funding. It is a funding requirement that will go away again. If there is a ten-year wind-down, that funding can be there for a very long time. It then becomes more difficult to distinguish between a loss or an extended funding requirement for the State.

Mr. Alan Dukes

Professional bankers are probably too polite to say it but to an extent the exercise becomes academic after a given point. Once we say we want to wind down, we lose control of the operation, because we no longer decide how long we must fund for, the people who have deposits with us make that decision. The faster they go out, the greater the funding requirement. It is artificial to talk about longer and longer wind-down periods because control is lost very quickly.

Deputy Michael McGrath

The announcement of a wind-down, irrespective of the period over which it happens——

Mr. Alan Dukes

It will precipitate a reaction. I come back to the basic logic of the option we have come up with. A wind-down over whatever period means loss all the way and funding requirement all the way. If in the process we can put an entity together that can create value and that is viable economically, we will get something back that is not present in any of the other scenarios.

Mr. Maarten van Eden

There are essentially two main reasons for continuing the bank in some slimmed down form. One is that value can be created and that we maintain to an extent the funding platform. Funding is scarce and it is important in the sizing up of the choices to keep a sharp eye on the funding implications.

Mr. Alan Dukes

There have been suggestions that there are other ways we can deal with this banking crisis. They all ignore one crucial factor. As far as I am aware, none of the examples talked about are examples of the working out of banking crises in the sort of market conditions we see today. All of the other examples have taken place in relatively liquid international market conditions, none of them has taken place in a seized up international market such as we have today. That is an important difference because whatever option is taken, funding is a major aspect of the problem we must deal with.

Deputy Michael McGrath

How much is the provision on the non-NAMA loan book?

Mr. Maarten van Eden

At the end of 2009, the provision on the €36 billion that is non-NAMA was €4.8 billion.

Deputy Michael McGrath

Is that adequate?

Mr. Maarten van Eden

No, we will have further impairments to take in the course of this year but they will be significantly less than the losses that will be realised from the transfer into NAMA.

Mr. Mike Aynsley

And within the constraints of the €22 billion.

Deputy Michael McGrath

That is factored into that?

Mr. Mike Aynsley

Yes.

Deputy Arthur Morgan

It is frightening to hear some of these figures being bandied about so casually. Mr. Dukes thinks Mr. Aynsley and Mr. van Eden are polite because they are professional bankers but I meet people every week dealing with professional bankers regarding their homes, mortgages and businesses and they do not see them as being polite in those circumstances. That is no reflection on the witnesses, that is just my experience and it is worth noting.

The transfers to NAMA are on a reducing scale.

Mr. Maarten van Eden

The largest transfers come first.

Deputy Arthur Morgan

How many will there be?

Mr. Mike Aynsley

Four.

Deputy Arthur Morgan

Is that a moving target?

Mr. Mike Aynsley

Yes. We are dealing with the constraints of NAMA and its capacity to take them. Depending on the workflow in NAMA, it might tell us it will take three connections in a weekend instead of five.

Deputy Arthur Morgan

We can identify with Mr. van Eden's point about the moving target, but since this crisis broke we have never been given hard information by the banks. We have been misled, with gross underestimations at every turn. At the minimum there is an issue of trust. Is there any way to address that?

Mr. Maarten van Eden

To be fair to the Irish people, to have lived in a society where property prices went up like a rocket for 15 to 20 years and then property prices declined by more than 50%, it takes some getting used to.

Deputy Arthur Morgan

Getting back to the trust issue, how tight is the auditing process? The 2008 accounts demonstrated a technical book value of €784 million when it transpired there was a €12.7 billion loss. Why were the audits of those accounts, which were signed off by the previous directors, and obviously were looked at by the present directors, accepted without qualification? If someone does business in Britain, and sterling rises or falls causing differences in profits annually, there would be comment from the auditors to explain it, saying currency fluctuations must be taken into account. None of that happened in the audits of Anglo Irish Bank. Can we expect more discipline from the board in holding the auditors to account? Can we expect the auditors to be more open about this? I am talking about trust. How the hell can anyone trust anybody in banking at the moment when we look at the current mess? We are not hanging this around the current board's neck, they came late to this and it would be grossly unfair to imply that. At the same time, I hope the board understands that.

Mr. Alan Dukes

I will be precise and focused in this comment. The provisioning policy applied in the preparation of the 2007-08 annual accounts was exactly the same as the provisioning policy Mr. van Eden spoke about earlier. The provisions that were made at that time were, as far as I can see, properly made according to the rules. What happened to property prices between September 2008 and the end of 2010 is what has caused the huge increase in provisioning that we and other banks have had to make since then. It would not have been proper or acceptable for the auditors or the bank in September 2008 to say "Property prices have begun to slide and, therefore, we are going to make a bigger provision against the future slide of property prices than we can make on the basis of the rules as they are today." Had they done that, they would have been in clear breach of proper accounting procedures. I have to say — and I do not think I am revealing any confidences that I should not — when we looked in the bank, at the end of 2008 and early 2009, at what was happening in the market, we decided we had to do a new examination of provisioning, which we did, and finished it around the end of March 2009. The figures that came out of it were absolutely appalling.

We felt at that time that we had better tell our shareholder, the Department of Finance. It would have been forgiven for thinking — I am not suggesting this is what it thought — that we were painting a very bad picture in order to increase the amount of recapitalisation we could get. Whatever it thought, it rather prudently decided it had better get somebody else to second guess our figures and it appointed a firm to do this. We, separately, got two other experts from another institution to do a slightly different kind of evaluation. The three examinations came out at roughly the same order of magnitude of provisioning that would have been justified at that time. So far as we could determine, the real reason for the deterioration was a certain deterioration in the property market between September and December 2008 but a much more rapid deterioration between January and March 2009. I can understand the emphasis being put on trust and the shock it is to people to see that provisioning figures increase very rapidly over a very short period. I know it is difficult for the general public to understand this but it is not necessarily that anybody is telling lies or that they are inventing things, it is that as we do these estimations according to the rules, we have to do it at the point in time at which we do this and in a falling market that is going to get worse.

May I pick up on one other comment made by Deputy Morgan in respect of the conduct of banks? Quite honestly — and I am not trying to deflect anything — we have heard every kind of comment about how banks are conducting themselves now. We have even heard every kind of comment about how Anglo Irish Bank is conducting itself. They range from accusations by some people that we are writing off loans right, left and centre, but not for them, to the other end of the spectrum where we are getting absolutely no sympathy at all and asking for a break. The truth is, as Mr. van Eden and Mr. Aynsley said earlier, in the situation in which we are at present, we are tailoring our response to every individual client to find the best way of dealing with that client's issues. Sometimes we have to come to the conclusion that there is no point in continuing indefinitely. At other times, we come to the conclusion, and sometimes get criticised for it, that this is a project that needs a little more money put into it to get it to the point where it can begin to produce a flow of income.

Deputy Arthur Morgan

Is Anglo Irish Bank talking to the administrator of Quinn Insurance with a view to recouping Anglo Irish Bank's investment?

Mr. Alan Dukes

Our general approach is that we want to recover as much as we possibly can from every loan. I simply cannot say any more than that about the Quinn Insurance issue.

Deputy Arthur Morgan

Then we know that Anglo Irish Bank is talking to the Quinn Group.

Mr. Alan Dukes

We are and everybody knows that. Our concern in that case, as in every other case, is to maximise the return to the bank, in the interests of the taxpayer.

Chairman

I call Deputy Fahey or Senator Boyle.

Deputy Frank Fahey

I will allow Senator Boyle first.

Senator Dan Boyle

In his presentation, Mr. Dukes said it is all change at the bank. He has taken on a full-time position as chair and there is a new management team and a new board. To what extent is the new board examining the previous activities of the company before it came into State ownership because it seems, at the very least, under previous boards and previous employees of Anglo Irish Bank that some degree of reckless trading was taking place? In his presentation, he mentioned that there are ongoing investigations with the ODCE. Can the recapture happen from the State-owned company's point of view in acquiring information as to whether reckless trading took place, whether individuals were involved, and whether the board had knowledge of such reckless trading that can identify many of the loans that are impaired? He mentioned the voluntary reduction in staff numbers from 1,800 to 800. I presume that many of the 800 people who are still working in the organisation would have been able to sanction loans, would have been involved in sanctioning many of the loans, and are themselves impaired. Does that raise questions in regard to the liability that has accrued ultimately to the State and, if so, is any action being taken?

To what extent will the new board, and ultimately this new bank, depending on the examination that is being done elsewhere, and whatever commission of inquiry will happen, use its own resources to initiate legal inquiries to recover money that was lost to the bank because there appears to be much uncertainty about it? I noticed that in his presentation, he almost threw his hands up in the air to say the time of the inquiries is unknown and that he will be a victim as much as anyone else. I encourage him to be a little more proactive and see if there are opportunities in challenging much of what has gone on previously.

The brand "Anglo Irish Bank" is a discredited brand. I do not think there is any argument about that. The policy choice that has been made is to come out with a far smaller bank after the assets have been dealt with by NAMA or the bad bank approach. Does this also include a change of name for a new bank and a change, of not only structure, in the type of bank it is likely to be? Anglo Irish Bank styled itself as a development bank in the past and, obviously, that is a model that has been discredited as a result of what has happened in recent years.

There were questions earlier about a third banking force but it seems that the opening, in terms of giving consumer choice in the banking area, is in the area of small loans, small depositors, and mutual banking which has suffered similar damage. That does not seem to be a model that either Anglo Irish Bank of old or the current bank is interested in following. A comment on the type of bank the new smaller bank would see itself as being would be useful.

I ask the extent to which the bank has begun initial investigations which would assist an inquiry when established by the Oireachtas or in which this committee may be involved, so that the bank would be able to hand over information directly without going through time-delaying processes. This would help us all to get to the bottom of these issues. The bank is in a unique position in that as of this month, it has cut practically all ties with the previous bank but it has access to the information that informed the previous bank's activities and decisions. The delegation can be the people who will be most helpful in ensuring that information is given to those who have to assess it and to the general public so that confidence can be restored in this area.

Deputy McGrath referred to the cost element. There may be a situation in the next three to ten years where the balance between the €22 billion — if that figure is held or exceeded to any extent — is over and above the cost of the winding down. Is there a contingency in place for such a situation? This may be a decision that will need to be made in the medium term if not in the short term as to whether the bank has a viable future.

Mr. Alan Dukes

The initial point where that decision, which the Senator has mentioned, will intervene, will be at the conclusion of the discussion with the European Commission. Frankly, our hope is that the Commission will sanction and agree with the formula we have put forward. We will then proceed with operating the split and setting up a new bank and an asset run-off company. As Senator Boyle said, it is very clear that the new bank will have to be rebranded. I do not think there is any way out of that and we will want to emphasise the fact that this is a different animal. We would not consider setting up a mutual bank or a retail bank as both of them would entail very substantial costs. We see the new bank as a medium-sized commercial bank with that kind of range of activities typical of such a bank. Anglo, even as it has been in the past and as it is today, is not entirely a monoline bank. Anglo has done a good deal of business lending and some other kinds of activity and those are kinds of activity we would like to develop. We are somewhat constrained in going down that road for the moment because the European Commission, for reasons which we understand but which are not directly relevant to the development of Anglo, does not like the idea of diversification. However, we can agree with the Commission on the formula of activity for a new bank. I do not see that being a problem.

I have not taken on the position of a full-time chairman. I am a non-executive director of the bank. It feels like full time a lot of the time. It is important to have a professional team of management and a board of non-executive directors whose main function is to probe, to challenge, to examine, the management proposals, in order to ensure that the taxpayers' interest, the public interest, is properly defended.

Senator Boyle may have a slightly exaggerated view of what we do with the information which is in the bank. We are dealing with the results of how things were managed in the bank prior to the end of 2008. There is a whole series of issues to be dealt with. One of the items we regularly look at is how we get ourselves out of the consequences of decisions made — decisions that were exceptions even to the then policy of the bank prior to 2008. We have the argument at every board meeting as to why we are not making more rapid progress in getting out of these exceptional situations where either concentration limits or credit policies or various other aspects of loan decisions that were supposed to be matters of policy, were not followed correctly. We are certainly trying to cure all of that.

The Senator bordered on an issue that was raised earlier and to which we have not yet responded. I am glad to be able to deal with it. The issue is the bank's use of its right to privilege with regard to the ongoing investigations. The issue has been raised and it is a surprise to us, in the context of the most recent request by the Office of the Director of Corporate Enforcement, ODCE, to retain information that the bank has made available for a further period in order to have time to examine it in depth. This was the third occasion the ODCE made such a request and which was not opposed by the bank as it is entirely happy for the ODCE to have access to all this information. However, it was the first occasion on which the court made any comment about the use of privilege, which in this sense, is already well established in law.

We are not being innovative in using it in any way. I have not seen anything that suggests there is any reason in law for a State company to take a different view from a company in the private sector in this regard. If it is of any comfort to members of the committee to know this, the issue of whether or not we waive privilege at this stage will make no difference so far as we can ascertain, to the length of time it will take the investigation to take place. Without saying anything about the conduct of any other party to an investigation, I would simply draw the committee's attention to the fact that the Director of Public Prosecutions has recently stated — this is not a criticism but a statement of fact — that our legal and judicial system has not yet got around to dealing with the consequences of the huge amount of information that is now spun out by electronic communication. This is partly at the heart of the problem we have now.

Various agencies, including in particular, the ODCE, have come to the bank, looked for information and we have facilitated them to the maximum extent possible. We have absolutely no interest in impeding any investigation. However, the amount of material they have taken away is huge. The amount of documentary material they have taken away is very substantial but the amount of electronic material is enormous. I am not fully au fait with all the ins and outs of this issue but there is a problem in the way one deals with electronic information. If it is manipulated in any way before it is sent back where it came from, one runs the risk of corrupting the information because it can subsequently be claimed that it is not the same file which one was given in evidence and this is one of our problems about how to handle this situation.

The issue of privilege as being applied by the bank is being applied on a prudential basis in the interests of the taxpayer. It is not being applied for any other reason. It is fair to say that up to the comments that were made in court on the last occasion, we had never been asked to waive privilege and nor did the court ask us to waive privilege. I am not a lawyer but I can see no reason the rule of law should not apply in the same way to a publicly-owned company as it does to a privately-owned company. The rule of law is the rule of law.

Deputy Arthur Morgan

Could the bank not allow the ODCE copy the files?

Mr. Alan Dukes

The ODCE has the files.

Deputy Arthur Morgan

Then there would be no displacement and distortion.

Mr. Mike Aynsley

They have privileged and unprivileged information.

Deputy Arthur Morgan

But they are not allowed to look at the privileged information.

Deputy Frank Fahey

So why did the judge make the comment yesterday or the day before?

Mr. Alan Dukes

The Deputy will have to ask the judge that. All I can say is that he did not make any such comment on the two previous occasions when the issue was before the court. Let me make the point very clearly, the issue was before the court because the ODCE quite rightly wanted to be sure that there could be no subsequent questioning of the validity of its process of gathering information and evidence.

Deputy Frank Fahey

What is the potential loss to the State on the inclusion of the subordinated debt in the bank guarantee in September? First, the chairman of Anglo Irish Bank, Mr. Dukes, mentioned that this is a different animal and that one must focus on where one is going. I want to take my questioning along that route. I agree there have been horrendous losses but as Mr. van Eden has said, the fact is that the losses have been made and we are not going to get them back.

We are extremely lucky——

Chairman

May I advise members that we must vacate the room at 3.30 p.m. at the very latest.

Deputy Joan Burton

Chairman, some members have other commitments in the House.

Chairman

We can continue with questions.

Deputy Frank Fahey

The Oireachtas is very lucky to have people of such high calibre to take over the new animal of Anglo Irish Bank, which will be renamed. I wish to acknowledge the qualities of the chairman, who is working in a part-time capacity. The State is very lucky that Mr. Dukes has agreed to become chairman of Anglo and I congratulate him on his appointment. Maybe I should be commiserating with him.

We have two world experts in banking in Mr. Mike Aynsley and Mr. Maarten van Eden. Let us consider the opposite to winding down the bank and instead winding it up along the lines the witnesses have proposed to the European Commission and let us hope it will agree with the proposals they have made.

How many of the loans that have been transferred or are being transferred to NAMA are performing loans? In terms of the breakdown of assets, those that have been transferred to NAMA and the €36 billion that has remained of which a figure from €13 billion to €20 billion is impaired, can the witnesses give us an idea of the quality of the assets? Mr. Aynsley drew a distinction between bad loans and bad assets, but bad assets can become good assets in time.

Mr. Mike Aynsley

Loans can become good assets.

Deputy Frank Fahey

Yes, that is correct. Given the cyclical nature of the property market and it is also heresy to talk about the graph going back up again, are there any indications of property investment funds from outside the country interested in buying some of those loans that obviously have been seriously discounted? What do they see as the future of Anglo Irish Bank working with NAMA in continuing, albeit in a much more prudent fashion that was the case in the past, as a medium-size commercial bank? Will the witnesses give us a feel for the future going forward? We have had property crashes in the 1970s, 1980s and 1990s. They were not as severe as at present. We did not have as severe a property crash as Britain, from which it recovered.

Allied to that may I ask about the percentage of the bank portfolio that is in the UK, the US and Europe? Is it not true to say that there are good assets outside the country which do have the potential, if the bank can work through with them to start to generate a profit for Anglo or NAMA? May I suggest there is a future for Anglo Irish, the new bank, to work with NAMA in processing some of those bad assets that in new ownership will become assets that will produce substantial profits?

In regard to the capitalisation of €2.5 billion for the new bank, what capacity do they have in the new scenario, approved by the EU to increase the capital ratios and what are the difficulties, given that it is a nationalised bank? When times were bad in the country, ACC and ICC proved to be very good institutions which assisted the development of the economy when there was nobody else to assist. Could I put it to the witnesses that the new Anglo coming out of the recession could equally be a very significant performer in helping this country out of the recession and providing a good competitor for the two main banks?

We questioned Mr. Honohan yesterday on subordinated debt. There has been a great deal of misunderstanding and misinterpretation. In fact one of the Deputies suggested yesterday that there would be €14 billion of taxpayers' money lost as a result of subordinated debt being included in the guarantee. I think that is ludicrous. Given that the report by Professor Honohan mentioned that subordinated debt of €2.1 billion was guaranteed for Anglo and that the €2.1 billion was a dated subordinate debt, that none of that subordinated debt has to be repaid by Anglo before the guarantee runs out on 29 September, therefore that does not apply in the case of the guarantee. Given that the Minister for Finance has indicated that he will not be continuing with subordinated debt after that, I think I heard Mr. Dukes mention something about this on radio, the witnesses will be in a position to negotiate with the subordinated bondholders, and as they have already told us they have made a profit of €1.8 billion on the basis of the discounts received. In fact there will not be any loss to the taxpayer as a result of the guaranteeing of subordinated debt.

Mr. Mike Aynsley

Perhaps I will make a start on the Deputy's questions. I think it is worth looking at the split that we intend to arrive at when we talk about a split bank that has roughly €15 billion, including the €15 billion of assets in the good bank and the residual portfolio of assets or loans which will be run down.

An important point that needs to be made is that the assets going into the asset run-down company are not necessarily all bad assets and they are not necessarily all bad loans. However, as a bank we have to set a selection criteria of what we want to take into the new bank which allows the portfolio of loans to comply with a series of parameters. We set a series of filters such as what is the maximum loan to value ratio and the maximum interest cover, or what sort of interest cover we want to have on a loan at a minimum. There are many different filters that we apply. What sort of concentration risk is one prepared to take to an industry and what sort of concentration risk per customer? There may be loans that are performing that will shift into the bad bank because they will not comply with the criteria we have set. These are primed to be restructured over time into assets that partially can be owned by other institutions as loans or organisations can participate from a loan perspective alongside us. This might then allow the assets to come back into a good banking entity. Whether they are in the asset rundown company or NAMA, a series of assets will, over a period of time, need to be refinanced and to come back into the private sector. We expect to participate in this area. Even if it is not something we will concentrate on as a priority, it is an important area as these assets will form part of our portfolio going forward.

Mr. Dukes said we would concentrate on the areas of commercial and corporate activity, trade finance, securitisation and syndications. The bank has a skill base and some expertise in those areas and a significant number of new entrants specialise in corporate finance. These areas will be useful in reshaping the business portfolio. We are currently dealing with asset portfolios in Ireland, the US and the UK. There has been something of a recovery in markets and we are starting to see some green shoots in the economies of the UK and the US so it is, perhaps, not surprising that the worst performing portfolio is the one in Ireland.

The foreign portfolios are quite important to us. The €15 billion being put into the new bank will be split equally among the three regions at first, with an emphasis on maintaining modest growth in foreign locations in favour of a modicum of growth in the Irish marketplace, which we consider our core market. The five-year projections are for the Irish element of the loan book to grow and this should support the economy as we go forward.

We are trying to position the new bank within the constraints of the European Commission, to focus on growth in Ireland. It is important to retain geographical diversification as we are not very well diversified by sector. The foreign locations also give us access to markets, which are particularly important for funding purposes.

Deputy Frank Fahey

Is Mr. Aynsley saying that, because the Commissioner asked the bank to treat Ireland as its strategic market, the intention is to sell off rather than keep the portfolios in the United States and Britain? I understood those markets to represent the best chance of making profits in the future.

Mr. Mike Aynsley

The Commission's start and end points are to return the bank to viability. The US and the UK are quite important to the overall portfolio from that point of view. Their markets are very important from the point of view of accessing funding and that will continue. The main growth in the asset portfolio and lending businesses going forward is targeted to take place in Ireland to support the Irish recovery.

Deputy Frank Fahey

What is the percentage of performing loans in the €36 billion going into NAMA?

Mr. Maarten van Eden

Of the €35.6 billion of loans designated to go into NAMA at year end, €25 billion were impaired.

Deputy Frank Fahey

That is approximately 66%. I also asked about the subordinated debt.

Mr. Maarten van Eden

As Deputy Fahey knows, in 2009 the bank carried out a liability management exercise. A portion of our tier 1 debt, some of our upper tier 2 subordinated debt and one lower tier 2 debt issue were bought back at a significant discount to par. It took place in a market transaction in which investors were free to participate. The buyback took advantage of the fact that subordinated securities were trading at very significant discounts to par. The take-up in the liability exercise was not 100% but it was very significant and €2.4 billion, nominal, of securities were repurchased at a profit of €1.8 billion.

Some subordinated debt is still outstanding and we have been thinking of the same issues as are implicit in the Deputy's question.

Deputy Frank Fahey

As chief financial officer, can Mr. van Eden give me a sense of the bank's potential?

Chairman

We must move on.

Deputy Frank Fahey

I wish to ask Mr. van Eden a question. What are the prospects for the new bank over the next five years, assuming it is approved?

Mr. Maarten van Eden

If one gets the opportunity to start a commercial bank which is very liquid and well capitalised at the bottom of an economic cycle, such as we have in Ireland at the moment, then by acting with discipline and in a responsible fashion there is no doubt that it can be a viable enterprise.

Chairman

We have to finish this session at exactly 3 p.m. as we must discuss another item for half an hour.

Senator Shane Ross

I thank the witnesses. I do not wish to be impolite but I am more interested in the people who do not come to these meetings, rather than in those who come. The chairman gave details of the new board and I am particularly interested in the corporate governance of the bank. This does not apply to Mr. van Eden as he is not on the board.

Board appointments to this body are extraordinarily sensitive for many reasons, not the least of which is the fact that it is a nationalised institution. There is a strong political input and two of the recent appointments raise issues of concern and controversy. Can Mr. van Eden and Mr. Aynsley comment on the appointment of Mr. Kennedy and Mr. Eames? As Mr. Dukes said, Mr. Kennedy was previously group director in finance and enterprise technology at AIB. That is true as far as it goes but the dates are not given. In fact he was there from 1997 to 2005. After that he received a particularly lucrative contract with AIB, one of his responsibilities being that he was in charge of risk. It is particularly worrying that someone who was in charge of lending at a bank that had the greatest exposure to property in the history of the State during this frenzy, who was appointed head of risk where he traded risk recklessly and, having left the bank, now pops up here. It is extraordinary. This individual was there at the worst time and he pops up here to have an input into a bank that is vulnerable to the charge that it also traded recklessly in property. Is Mr. Dukes happy with that appointment and did he make that appointment?

Chairman

Under the salient rulings of the Chair, members should not comment, criticise or make charges against a person outside of the Houses or an official by name or in such a way as to make him or her identifiable.

Senator Shane Ross

I am not making any charges.

Chairman

I think you are.

Senator Shane Ross

Let me ask a question then rather than making a charge.

Chairman

That would be quite allowable.

Senator Shane Ross

I am coming to the question but the context is important. What input did the board have into this appointment? What criteria did it use? Is it happy with an appointment of this sort?

The second appointment I mentioned was that of Mr. Eames. Talking to other sources——

Chairman

The Senator must remember the salient rulings of the Chair.

Senator Shane Ross

He is a former Fianna Fáil Senator, which is not on his CV.

Deputy Joan Burton

Appointed by Mr. Haughey.

Chairman

That does not need to be included on his CV.

Senator Shane Ross

Of course not, nothing has to be on it, it is selective.

The appointment of Mr. Eames was a great surprise. I inquired about this elsewhere — and perhaps the board could confirm this — and this was not an appointment made by the board, it was obviously a political appointment. If the board must accept appointments like that, and Mr. Keane's appointment was similar, he is part of the golden circle of bankers in this country, while Mr. Dukes is here and trying to paint a picture of a new broom salvaging something from the wreckage. Corporate governance is probably very important in his case, possibly more than anyone else, but it appears that the board is receiving people who have been parachuted in who are part of the golden circle or part of some other agenda that is nakedly political.

What procedures did he take to interview and talk to these individuals before they were appointed? Is he happy with those appointments and the criteria I have mentioned, particular Mr. Kennedy being in AIB for that period and Mr. Eames being a political appointment?

Mr. Alan Dukes

Senator Ross reminds me of what they say about the Bourbons, iIs n’oublient rien et ils n’apprennent rien, they forget nothing and they learn nothing. I am not going to follow Senator Ross into this.

Deputy Joan Burton

Is Mr. Dukes talking about Fianna Fáil or about the board?

Mr. Alan Dukes

I am talking about Senator Ross.

The board for some time had urged the Minister to make new appointments. The committee will recall that a former member of the board of the bank, Mr. Daly, was removed and made chairman of NAMA. We had a small board and were anxious to increase the numbers. We discussed the matter on several occasions with the Minister. Three appointments were proposed to the Financial Regulator, as they must be, and the three appointments were approved by the Financial Regulator. The three members of the board recently appointed have already made their mark as contributors to the work of the board and the entire board, without exception, is committed to the sort of programme Mr. Aynsley, Mr. van Eden and I have outlined today. I have every confidence in the support of the entire board for that and I have no doubt that all current members will make a substantial and constructive contribution to what we set out to do.

Senator Shane Ross

That does not answer any of my questions. What input did Mr. Dukes have in interviewing these guys?

Mr. Alan Dukes

That is as much of an answer as the Senator is going to get.

Senator Shane Ross

Why?

Mr. Alan Dukes

I am not here to write a column for the back page of the Sunday Independent.

Senator Shane Ross

That is gratuitously ridiculous and insulting. We are entitled to ask questions of people on the boards of nationalised banks. For Mr. Dukes to say he will not answer a question about who they are and what procedures were followed is completely unacceptable. It is important that people know this.

Mr. Alan Dukes

It is perfectly adequate.

Chairman

Senator Ross, Mr. Dukes has answered the question.

Senator Shane Ross

He has not, he said he had great confidence in these men.

Chairman

He has explained the procedure whereby their names were proffered to the Financial Regulator and they were cleared by him.

Mr. Alan Dukes

It is perfectly adequate on my part to say that these three appointments have gone through due process and I am happy with every member of the board.

Senator Shane Ross

Did Mr. Dukes interview them beforehand?

Mr. Alan Dukes

I am not going to answer that question.

Senator Shane Ross

Why not?

Mr. Alan Dukes

I do not choose to.

Senator Shane Ross

We are entitled to know.

Mr. Alan Dukes

No you are not.

Senator Shane Ross

How much are these guys paid?

Mr. Alan Dukes

Senator Ross can look at the annual report in which the fees to directors are disclosed.

Senator Shane Ross

This is public money and we are entitled to answers to questions about these men.

Mr. Alan Dukes

That is why we have disclosed all of these figures in due and proper form and in due and proper time in the annual report of the bank. They are set out there very clearly.

Senator Shane Ross

The point I am making is not how much they are paid, the point I am making is that they are paid with public money and as a result we are entitled to ask questions about the procedures the board followed to interview them. It looks to me as if these people were imposed on the board but Mr. Dukes is not prepared to say so.

Mr. Alan Dukes

That is not true. All due procedures were followed.

Senator Shane Ross

Who interviewed them?

Mr. Alan Dukes

All of the due procedures have been followed when making these appointments to the board.

Senator Shane Ross

No one interviewed them, they were parachuted in, they are part of the old guard and Mr. Dukes is accepting them.

Mr. Alan Dukes

The Senator cannot stand up that allegation.

Chairman

The Senator should back up from that allegation.

Senator Shane Ross

I want to know how it happened, that is all I am asking.

Chairman

Senator Ross is not letting the chairman answer.

Senator Shane Ross

How did it happen?

Mr. Alan Dukes

All of the due procedures were followed in making those and all previous appointments to the board. They have been approved by the Financial Regulator and that is all I am going to say.

Senator Shane Ross

Were they interviewed by the board?

Mr. Alan Dukes

I am not going to enter into that.

Chairman

Before we conclude the hearing, I want to ask a question. Yesterday, Professor Honohan offered the view that the chief risk officers of banks should be on their boards. What does Mr. Dukes think of that idea?

Mr. Alan Dukes

I would be happy to discuss that matter with the Governor or the Financial Regulator. The reason the board is configured as it currently is, is because we believed after the nationalisation of the bank that we should follow established procedure in semi-State companies, where the only executive who is also a member of the board is the chief executive officer. That was our thinking. We subsequently set out to recruit a chief risk officer, a chief financial officer and the others I mentioned earlier. We are happy that we have got people of the highest calibre. We have not discussed subsequently any other configuration of the board but if the Financial Regulator, who now has a consultation paper, wishes to make suggestions in that regard, we will be perfectly happy to examine them.

In case there is any doubt, there is absolutely no difficulty, no barrier, no hesitation or lack of transparency in the exchanges between the board and the senior management. There is a robust and open exchange of ideas between all of the members of the board and all of the members of the senior management team.

Deputy Kieran O’Donnell

Can we ask the same question of the senior management?

Mr. Alan Dukes

They will give exactly the same answer.

Chairman

I thank Mr. Aynsley and Mr. van Eden for their attendance today. I know they have been asked many different questions. It has been a great assistance to the committee to understand what the bank management is doing and its excellent work. I wish them continued success.