The following is extracted highlights from Niall O’Dowd’s interview with David Drumm, former chief executive at Anglo Irish Bank, made available to us by Niall’s website, Irish Central. The interview appears in today’s Sunday Business Post (behind paywall).
O’Dowd: “Let me ask you about David Drumm and Sean Fitzpatrick. One theory is that you were a young guy, who was plucked from relative obscurity, and made CEO right as the ship began to sink and that FitzPatrick did that very deliberately.
Drumm: Sean was a very, very powerful person; he was a controlling person not just of the executives, but of the non-executives. He ran the board, in a highly premeditated, controlled manner there were meeting before board meetings to make sure he got what he wanted and so on. Sean was like that before I became CEO, he was 18-years as CEO and he wasn’t planning on changing. So as chairman he was an executive chairman for all intents and purposes and a highly controlling one, there is no doubt in that. Anyone that knows him, knows that is true.
O’Dowd: “Do you feel in any way that you were brought into that job, because you were the least experienced of the people applying for it and that he was then able to control you?”
Drumm: “I am pretty sure I was his candidate, he thought I could do the job, I worked for the bank for many years and done a lot of good things in the bank for many years but as the youngest person there, I was the likely person who would give the least resistance. I think that is true.”
Who Knew What And When
O’Dowd: “Turning to Anglo’s downfall who knew, what, when, is a huge issue in Ireland, particularly on the collapse of Anglo.”
Drumm: “This bit about is being presented about who knew what, is like you are kind of trying to put it into like a Watergate thing, like who knew this scheming thing was going on? That is actually not the reality of of things, because everybody was on the same team in 2008.”
O’Dowd: “But later on, say with regard to the Maple Ten, who knew?”
Drumm: “The financial regulator and the Central Bank were in every meeting with me and other directors of the bank throughout 2008 and I have to tell you, that was team work, because it was a common problem.”
O’Dowd: “But the Maple Ten loan was … ?
Drumm: “Yeah, I am getting to that. That was the solution to a problem, which went to the very destruction of the Irish financial system and hence the government, and through it’s offices through the Central Bank and through the regulator were pushing the bank like hell to fix the problem.
The bank of course was pushing itself and the board was pushing to fix the problem because it was a threat to the bank. We tried everything and with their agreement and their co-operation and their help, we went out to the Middle East, we came here to U.S., we tried to place Sean Quinn’s stock and everything failed and I think that had more to do with the environment we were in, it was very difficult times.
We ended up taking our least favored route, which was to place it with private investors. Why was that least favorite, because the banks share register, up until Mr Quinn developed his 25 percent ownership was pristine and we were quite proud of it.
That mean people like Willy McAteer directors before me and everyone else and me then afterwards had gone around the world banging on doors of large investment houses, all these great investment houses, telling them the story of the bank and getting them to invest. So we looked at the share register of the bank, it was determined like that.”
O’Dowd: “I can accept that but the Maple Ten was an insane proposition the bank loaned them the money to buy stock in Anglo Irish?”
Drumm: “Well it was to take stock out of a very dangerous derivative position.”
O’Dowd: “But no bank in the world could claim that that was a legitimate transaction, could they?”
Drumm: “Lending money to on a secure basis to good customers is the business of a bank. It was an unusual thing to have to do in that it was very, very difficult and unusual times and more importantly it was agreed with our regulator.”
O’Dowd: “Who else in addition to the regulator knew? He must have told the department of finance that he was doing this.”
Drumm: “John Carney told me, John was the governor of the Central Bank, I spent a huge amount of time with John. He told me that the he was reporting it daily to the Minister for Finance. The whole thing was so dangerous to the country at the time, that everybody , Conn Horgan in one of his depositions, said that the working group ,the whole national apparatus jumped on it so the financial regulatory authority, the financial regulator himself, the Central Bank, the department of finance and this working committee were meeting daily, weekly . They were called the domestic standing group. They were as disappointed as us and expressed it when various attempts failed. We attempted to complete a transaction with Rabo bank, it failed they were very, very disappointed. When we came back from the Middle East empty handed, they were devastated. They called me day, after day, after day, to find out how it was going and when we called them up and said we are thinking of doing something with private investors, I then went down and sat with them and explained what we were going to do, frankly they were thrilled, chirpy ‘let’s get this done,’ because the fear factor was just huge.”
O’Dowd: “So this was the Department of Finance, the Central Bank…”
Drumm: “My connection would have always been the Central Bank and the regulator together.”
O’Dowd: “But the department of finance, the minister would have known about this?”
Drumm: “Well based on what John Hurley said, the importance of what was going on was going right to the minister for finance and most likely the Taoiseach was fully aware of it at the time as well . Put it this way, I cannot imagine, there was so much fear amongst everybody about the consequences for the country, that is the Taoiseach didn’t know about it, he should have.”
Sean Quinn’s Shareholding
O’Dowd: “Leading up to that how could Sean Quinn take these positions on the banks and buy so much stock without you knowing?”
Drumm: “The dogs on the street were talking in 2007 about the fact that Sean Quinn potentially had a share holding in the bank and we discussed it at the board. The first couple of times we brought it up we didn’t do anything about it, but then the chatter got a little bit louder and the board instructed myself and Sean Fitzpatrick to go ask him what’s going on. We never really got into what percentages, but around the board, there would have been, certainly in my own mind, there would have been an expectation that if he held stock, it was probably like in the low to mid single digits.”
O’Dowd: “At what point did it spark danger?”
Drumm: You have to notify the stock exchange at three percent, he didn’t have to notify anybody. So lets just take another example, if you saw another investor getting up nine/ten percent, if they did get up to ten percent they would have to go to the Central Bank for approval by the way, that they were going the direct route, you would sort of say, well what’s the attention. The investment community would worry about one big shareholder, what if he sells out and so on. So we in our heads thought maybe he had five percent or six percent, so we go up to the Ardboyne hotel we meet Sean Quinn and Liam McCaffrey.
It was just staggering. Sean’s sitting here, we were in the hotel room , Sean Quinn there and Liam McCaffrey is sitting opposite me and Sean then proudly tells us that he has 25 percent of the bank, even at that time he had 28 . I looked immediately at the chairman and I tell people the story, he physically moved backwards with the shock. We had it in our own heads, maybe it was single digits. So immediately we knew it was an issue for the bank, Quinn realized in our faces that he had missed something about it.”
O’Dowd: “What do you think he thought your reaction would be?”
Drumm: “That maybe it was a compliment to us, that he was buying a big chunk of the bank. What he didn’t realize , this is the unfortunate sad bit about it, he was a great entrepreneur , built huge businesses and employed a huge amount of people in areas that would not have seen employment. What he missed was the manner in which he did it, he went to these investment banks, nine investment banks and he went on margin. So they went out and bought the stock but because they had the stock on this CFD thing, they were able to lend the stock to hedge funds. A way for an investor/broker to make additional money on CFD is to actually use the physical stock to lend it out and they make a margin, they charge two or three percent margin on it. I am sure he wasn’t aware of it, the more of these CFD’s you do, the more there is available to short and the easier it us to short the bank and give yourself a problem. He didn’t get advice and he will tell you that himself.”
O’Dowd: “So he made a three billion dollar mistaken basically?”
Drumm: “As it turns out, but he contributed to the weakness of the bank in 2008 by doing it.”
The Bank Guarantee
O’Dowd: ” When did you start to panic considering what was happening?”
Drumm: “Post Lehman, Lehman went bust on the 15 of September 2008. The whole world just went into complete and utter panic, there is no other way to describe it. The Irish banking system in that two week period at the end of September lost 30 billion and Anglo lost six. I’m running from half a billion to a billion a day, now those numbers are big, they are big in any context. In the context of the bank, in the balance sheet to see that kind of money flowing out was panic. Sitting down in the Central Bank every day frankly begging them to do something. I put a proposal to them to give us a loan. We had an unencumbered balance sheet, 73 billion.
So all of our loans were sitting there as assets, a bit like owning a property that you could use as collateral. So I said to the Central Bank, will you give us a loan? The central bank in any country is meant to be the lender at a last resort, such that when a bank gets in trouble, or any bank has a system that they’ve got money to protect the system of the country. It became apparent to us that they did not have the resources to do it.
So I went and looked for a secure loan, that I could have over collateralized three or four times, if they gave me seven billion I could have given them 20 billion collateral or whatever they wanted and that was the way I put it to them. They never gave me an answer. There never seemed to be one person between the governor and the regulator.
O’Dowd: “How come they wouldn’t have had the money?”
Drumm: “They told me that they had four billion in the system in a number of pockets. There is a naivety to that as well on my part, because you go down and say well we are in a bad place, now we need to go to the Central Bank. I never thought I would see myself doing this, but I am going down to Dame Street with the begging bowl. Saying ‘listen we are in real trouble now, you’ve got to do something’. But you expect the governor of the Central Bank will say ‘thank you, I’m glad that you are here, now here is our procedures for this. You need to do this, this and this and we are gonna’. But they were clueless, because they were not ready for it. We asked for a certain amount of money to be secured, we were never given an answer. The two weeks, I call it the two weeks of Lehman, because it was that between Lehman and the guarantee being issued, went by with us running around trying to get the Central Bank, the government, we put messages into the Department of Finance because the governor kept telling me ‘you know I am relying on the department of finance here and I have to keep asking them’. He wasn’t getting answers from them. So they were all gone into, I think of it like balls of little mercury, sort of scattered. They just weren’t joined up.
“We came to the 30 of September, the 29 of September and we run out of money and I was down at the Central Bank and they said OK you are going to have to ask for emergency funding. Fine how do I do that? They sent me a draft of letter, I got it typed up, I signed it, we need two billion tomorrow to be able to open the doors. So signed that letter and then that was a long day, as you know. I could talk all day about that. We were down at BOI asking them to merge with us. But the end of the day was asking the Central Bank for the emergency funding, two billion. I went home, I ate my dinner and I went to bed and when I woke up in the morning I had several voicemails and messages on my phone and one of them was from Pat Neary to tell me that the government had guaranteed. Then of course I heard it on Morning Ireland. Anglo Irish did not ask them to do that, we asked for a secured loan.
What happened was Allied Irish Banks and Bank of Ireland went down to the Government and obviously talked them into provided a blanket guarantee.”
O’Dowd: “Do you think that was a mistake?”
Drumm: “Most definitely.”
O’Dowd: How did they manage to convince them?
Drumm: “Because I think everyone was trying to figure out what to do and it was panic. I am not criticizing them, everyone was panicking. So what did they do? Individual rescue packages or lending packages into the banks, which is what we were trying to achieve for Anglo might have staved it off, might have fixed it. They went with a sort of nuclear option, out of the bag, out of the box and we were, don’t get me wrong, we were extremely grateful. When we woke up that morning our problems were solved and we thought they were brave. The problem with the guarantee was it signed them up forever, they had no way back, it was blind. And then the thing they did next was self damaging, like Nama.”
O’Dowd: “Did they think the entire debt was like seven or eight billion? Did they know what the real debt was?”
Drumm: “They knew they were issuing a guarantee to the effect of 500 billion, because that was the size of the liability. But they reasonably and it was reasonable to believe there wouldn’t be the level of bad debts in the banks, because they weren’t looking forward as to what might happen and what have you.”
I think that is probably a reasonable view at the time. It was very brave to give the guarantee, but it was based on the banks are OK, Merrill Lynch and what have you. The two things in 2009 that then made that look like a poor decision, one was NAMA, because they fashioned that rod for their own back, they created losses in the bank they had just guaranteed. Which I still cannot understand why anyone would do that. The second one would be the Irish economy did go into a real hockey stick dive, starting in the first quarter of 09 and then the loans started to deteriorate.”
O’Dowd: “Did BOI and AIB mislead Lenihan and Cowen that night?”
Drumm: “No, I don’t think they mislead, I don’t think any of the banks believed there was anything like the bad debts that came afterwards. What they did know was that Anglo had run out of money, because we had been down to both of them, we had been down to BOI and we had talked to AIB but they were also running out of money and they wouldn’t last much longer. What pissed me off is they planted it entirely at the door of Anglo, Anglo owned a proportion of it, but they planted the whole thing at the door of Anglo and got themselves a guarantee. BOI told us they were having the same problems. ‘Were the big bank, but we’ll be OK, look at him, you better issue a guarantee, because he is going to bring us all down’. But they got the guarantee for their own benefit as well. They had actually very successfully pinned it all on Anglo, don’t mind some of it, but they pinned it all.”