The Anglo Irish Bank hidden loans controversy (also known as the circular transactions controversy) began in Dublin in December 2008 when Seán FitzPatrick, the chairman of Anglo Irish Bank (the state's third-largest bank), admitted he had hidden a total of €87 million in loans from the bank, triggering a series of incidents which led to the eventual nationalisation of Anglo on 21 January 2009. FitzPatrick subsequently resigned his position and was followed within twenty-four hours by the bank's non-executive director, Lar Bradshaw and chief executive, David Drumm. A new chairman of Anglo, Donal O'Connor, was quickly appointed from the board, a move welcomed by the Irish Minister for Finance, Brian Lenihan. A number of investigations have been launched into the reasons behind the three resignations. The Central Bank of Ireland is carrying out a review of the bank's dealings, although its Financial Regulator, Patrick Neary, has also since resigned his position. So too did a number of other chairmen, directors and executives involved with Anglo, Irish Life and Permanent and Irish Nationwide.
Within days of the initial admission, an announcement was made that Anglo Irish Bank would be one of three (alongside Allied Irish Bank and Bank of Ireland) that would be recapitalised by the Irish government. The recapitalisation of Anglo Irish Bank was expected to be effected in mid-January 2009, following an Extraordinary General Meeting (EGM). Lenihan instead unexpectedly announced the nationalisation of Anglo Irish Bank the night before the EGM due to difficulties he encountered with the recapitalisation process. Recapitalisations of the other two banks mentioned were expected by the end of March 2009 but, according to Taoiseach Brian Cowen, were expected to be finalised in early February 2009 at a total of €7 billion. The nationalisation of Anglo Irish Bank on 21 January 2009 followed two more resignations earlier that month. On 7 January 2009, another director, Willie McAteer, resigned, becoming the fourth casualty of the controversy. Two days later the Financial Regulator Patrick Neary retired amidst much criticism over his handling of the affair. After the nationalisation, the Chairman of Irish Nationwide, Dr Michael Walsh, resigned on 17 February, one week to the day that government-appointed directors announced they were investigating a deposit of billions of euro by Irish Life and Permanent, placed in Anglo Irish Bank before the end of its financial year.
Taoiseach Brian Cowen denied claims that he was protecting a "Golden Circle" of wealthy financiers from being identified. This mysterious group of ten businessmen is said to have received loans from Anglo Irish Bank in return for buying shares, in a move designed to keep the bank afloat.
Background Starting in 1986, Seán "Seanie" FitzPatrick spent eighteen years as chief executive of Anglo Irish Bank, during which time the bank grew from a small operator into the third-largest bank in Ireland. When he became the bank's chairman in 2005, handing over the position of chief executive to David Drumm, the bank was recording annual profits of over €500 million. The Anglo share price peaked at €17.60 in May 2007, an increase from under €1 ten years previously. Anglo was valued at nearly €13 billion and FitzPatrick's 4.5 million Anglo shares were worth nearly €80 million at this time. Prior to FitzPatrick's resignation, the Anglo share price had already dropped to €0.32, a drop of 98% with the entire bank valued at a low €242 million and FitzPatrick's stake reduced to €1.5 million.
The Financial Regulator first uncovered the €87 million loans in January 2008 when inspectors from the regulator's offices carried out an inspection into the loan book of rival lender, Irish Nationwide Building Society. The inspectors noticed that a large loan was provided to FitzPatrick at Anglo Irish Bank and later repaid. The Regulator discovered at a later date that similar loans were provided to FitzPatrick in September 2008 and repaid by him in October 2008. When the issue was raised with Anglo Irish Bank it was discovered that there were further loans between the two banks over an extended period of eight years.
It is uncertain which officials, if any, within the bank knew about the loans.
Every Anglo annual report contained a note displaying the total loans given to directors of the bank. This total was measured at a single point in time. In the case of Anglo this occurred on 30 September. FitzPatrick, instead of revealing the true figures of his loans, transferred some of them to the Irish Nationwide Building Society, returning them to Anglo at a later date. He acted in a manner that thwarted the transparency of Anglo's loan book. Financial authorities investigated if there were breaches of corporate governance. The Chief Executive of the Financial Regulator said that "a lay person would expect that issues of this nature and this magnitude would have been picked up" by the external auditors, Ernst & Young. After receiving legal advice Ernst & Young declined to appear before a parliamentary committee.
This in turn led to inaccurate figures for the total directors' loans given for eight consecutive years in the end of year Anglo accounts. 2008 was the first occasion on which FitzPatrick revealed his true figure, that of €87 million or twice the total of the other twelve directors' loan figures.
The Irish Independent described Anglo Irish as Ireland's Enron, and said that FitzPatrick would have already been arrested if this had occurred in the United States.
Resignations
Anglo Irish Bank FitzPatrick issued a statement on the evening of 18 December 2008, linking his resignation with a €87 million loan he had from the bank. Ireland's Minister for Finance, Brian Lenihan welcomed the appointment of a new chairman, Donal O'Connor, an official with a substantial commercial track record, saying he "seems a natural choice" for the role. FitzPatrick's resignation came little over two months after he had admitted that his former bank had made mistakes but insisted it had not been "reckless". Alongside FitzPatrick's resignation came that of Bradshaw who had held a loan jointly with FitzPatrick, a loan that was temporarily transferred to another bank prior to a year end audit without the knowledge of Bradshaw. On the evening of 19 December, Drumm announced he would step down with immediate effect, but said he will continue to work with the chairman through a transition phase until a replacement chief executive is agreed upon.
It is appropriate for me to step down today given last evening's announcement in relation to the resignation of Seán FitzPatrick and given the strong statement of support for the Bank and its recapitalisation programme by the Minister for Finance. Good progress is being made on the recapitalisation. It is undoubtedly in the best interests of Anglo that a new Chief Executive is appointed to lead the Bank through its next phase of development. The appointment of Donal O'Connor as Chairman together with a new Chief Executive augurs well for the Bank and all its stakeholders. It gives the Bank fresh impetus and an upward trajectory. I would like to thank all of my colleagues for their intense commitment and honest endeavour and their friendship over the last 15 years.
On 7 January 2009, Willie McAteer resigned his position as finance director and chief risk officer.
On 15 January 2009 the Government of Ireland nationalisedTaxpayer is picking up ailing Anglo Irish BankWhat the implications are for savers and investors as State takes over Anglo Anglo Irish Bank and its shares were suspended on the Dublin and London Stock Exchanges.
On 19 January 2009, the balanceAnglo Irish directors step down, bank downgraded of the Board, who had served while FitzPatrick was chairman, resigned. The consequence of Anglo's nationalisation caused steep Bank shares lose half their value in market 'carnage' falls, up to 50%, in the market value of the other two large banks on 19 January 2009.
Financial Regulator Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Financial Regulator Patrick Neary on 9 January 2009 announced his decision to retire as of 31 January that year. Neary's weakness in dealing with the issue has received much criticism, with Green Party Senator Dan Boyle calling for a strengthening of powers within the organisation and saying that confidence in Irish financial services had been eroded by events of the previous six months. Financial observers indicated that a replacement for Neary might have to be located in the United States or Britain.
There were also reports that the Financial Regulator may have known of the loans for eight years prior to their revelation. The Fine Gael finance spokesman Richard Bruton called for the board and senior management of the Financial Regulator to be sacked. The Financial Regulator hired a partner from Ernst & Young, to advise on the €440 billion bank guarantee scheme in January 2009, despite the fact that serious questions have been asked about why Ernst & Young did not spot the massive loans that former chief executive Seán FitzPatrick concealed from his shareholders for eight years. Consultants Mazars, which reviewed their operations said "that regulatory expertise was lacking in some areas."
Irish Nationwide On the evening of 17 February 2009, the Chairman of the building society Irish Nationwide, Dr Michael Walsh, resigned his position.
Irish Stock Exchange On 23 February 2009, the former Anglo Irish Bank director Anne Heraty unexpectedly resigned from the board of the ISEQ. The following morning, Dublin's ISEQ index fell over 3% to stand at 1,987, a 14-year low. The last time it stood under the 2,000 level was the middle of 1995.
Dublin Airport Authority On the evening of 24 February 2009, the chairman of the Dublin Airport Authority (DAA), Gary McGann, announced his decision to step down from the board, stating that his decision had been influenced by his former non-executive directorship of Anglo Irish Bank.
Outcome and nationalisation Anglo Irish Bank has said it would review its policy on directors' loans following FitzPatrick's resignation. The Financial Regulator announced he would be examining the loans issued by Anglo Irish Bank to all its directors, claiming he became aware of the existence of the loans "following an inspection earlier this year". Ultimately he became a victim of the controversy and subsequently announced his retirement.
The Chartered Accountants Regulatory Board (CARB) undertook an investigation into the "circumstances around the issue of inappropriate directors' loans at Anglo Irish" and into the performance of Ernst and Young. The Irish Association of Investment Managers expressed how it was "surprised and disappointed" at the controversy and announced it would be writing to Anglo's new chairman to describe its worries.