The people who helped wreck Ireland – and are still running the show
To Ruth and Rebecca
Published by the Penguin Group
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First published 2012
Copyright © Shane Ross and Nick Webb, 2012
The moral right of the authors has been asserted
Cover design: Andrew Smith, www.asmithcompany.co.uk
All rights reserved
ISBN: 978-0-14-197186-5
Prologue
1. The Department
2. Zombie Bankers
3. Access All Areas
4. Land of 999 Quangos
5. Fingers in Every Pie
6. Your Future Is in Their Hands
7. The Property-Pushers’ Bailout
8. The Judges: JAABs for the Boys
9. The Directory
Epilogue
Illustrations
Acknowledgements
Not even an untouchable is immortal.
It was a cold Friday morning in January 2012, the twelfth day of Christmas, when they came to bid farewell to Alex Spain. Mourners gathered at the Church of the Assumption in Dublin’s Booterstown Avenue. The service was packed with the great and the good of Irish business. Alex Spain was by all accounts a decent man. The mass was celebrated by the local parish priest, Monsignor Seamus Conway. Predictably, he lauded Alex Spain’s business successes. Afterwards, mourners followed the hearse to Shanganagh Cemetery, ten miles south of Dublin. Finally, they headed to Alex Spain’s beloved Milltown Golf Club for refreshments.
The obituaries in the newspapers followed. They told the story of a man blessed with many advantages in life. He was born in 1932 into the well-heeled Dublin professional classes: his father had been master of the National Maternity Hospital in Holles Street, and his mother was an architect who later ran an antique shop in the prosperous suburb of Ranelagh. Alex Spain ticked all the right boxes. He attended the up-market Blackrock College, where he captained the rugby team. From there he headed for University College Dublin, took a first-class degree in commerce and was again captain of rugby, a post held by his father before him. He became an accountant, soon joining Stokes Kennedy Crowley (SKC).
Spain was no doubt as brilliant an accountant as the obituaries said. So brilliant that he was prepared to open the most controversial of all bank accounts – of the infamous Ansbacher variety – for his Stokes Kennedy Crowley clients, back in 1972.
Offshore Ansbacher accounts had been used for tax evasion by a number of Ireland’s untouchables. Not every account was illegal, but all prompted awkward questions and the unwelcome interest of a High Court inspector. Spain was listed by the inspectors as being in a category of people whose sole involvement was the establishment of Ansbacher trusts to which they never transferred assets. The inspectors also stated that Spain had revealed in a letter that he himself was the ‘potential beneficiary’ of an Ansbacher trust.
One of the Ansbacher accounts Spain had opened was for the late property developer Phil Monahan, the chairman of Monarch Properties. In 2012 Monahan was named by the Mahon Tribunal as having been ‘likely to have known about’ what it deemed ‘almost certainly corrupt’ payments made by Monarch Properties to councillors to secure land rezoning.
Spain also opened an Ansbacher account for Neil McCann of Fyffes banana fame. And he opened one for himself. Despite Spain’s letter to the High Court inspectors insisting that his own Ansbacher account was never activated, they were satisfied that ‘this constituted the carrying out of business for him by Guinness Mahon Cayman Trust’, the offshore vehicle used by none other than Charlie Haughey and his own bent accountant, Des Traynor.
For some reason, unexplained to this day, no prosecutions have ever been brought against Ansbacher account holders. Secret settlements were made with the Revenue Commissioners but not a sinner was taken to court. Ansbacher account holders were untouchable.
In 1979, Spain succeeded SKC’s legendary Niall Crowley as managing partner, and served in the position for five years. The obituaries told of when Spain was sent in by the government as a consultant to reorganize B&I, the troubled semi-state shipping company. He was credited with removing a burden from the state when the company was sold to Irish Continental in 1992. In line with a pattern of uncanny coincidences that marked his post-SKC career, KPMG (as SKC was renamed following a merger in 1987) were accountants to B&I.
He combined his passion for rugby with another sport where businessmen establish useful connections – golf. Besides Milltown, his club memberships included the elite, all-male Portmarnock and the legendary Royal and Ancient in St Andrews, Scotland.
In the mid-eighties, when Spain was at the height of his powers, a joke did the rounds. The joke had Spain and two SKC partners, the brothers Conor and Laurence Crowley, being kidnapped by the IRA. The guerrillas take them into the Wicklow Mountains and demand a ransom, but it is refused. All three are granted a last wish before being shot. Conor Crowley, drawn to be the first man for the IRA firing squad, asks for a stiff drink and some Havana cigars. Spain, due to be shot second, merely wants to deliver his own epitaph to the assembled company – a one-and-a-half-hour eulogy of his achievements in SKC. Laurence Crowley, third in line, thinks for a moment and then declares that his wish was to be shot before Spain began his eulogy.
In 1988 Spain was made chairman of Xtra-vision, the video rental company. In May 1989 it was floated on the stock market with a value of IR£24.3 million, a massive figure at the time. The shares nearly doubled on the first day’s trading, eventually hitting a peak value of £102 million. But Xtra-vision expanded recklessly at home and abroad, burning cash at an unsustainable rate. The share price collapsed from a peak of £1.03 down to less than 10p. In late 1990 the company was sold to the financial services group Cambridge for just £5.5 million. Xtra-vision’s auditors were none other than SKC’s successor firm, KPMG.
Among the mourners at Spain’s funeral was David Dilger, another accountant from the SKC/KPMG stable. Later in his career Dilger had become a link with another of Spain’s more controversial business associates – Larry Goodman. Dilger was chief executive of Goodman’s Food Industries when Spain was chairman. The auditors, once again, were KPMG. They were also auditors to Larry’s flagship company, Goodman International. Spain shared the board of Food Industries not only with Goodman himself but also with the dodgiest of Fianna Fáil TDs, Liam Lawlor.
Goodman International went into examinership when Spain was chairman of Food Industries. The banks insisted that Goodman’s stake in Food Industries be sold to Greencore in 1992. Spain again somehow escaped unscathed from his association with the beef baron, of whom he had been a favourite.
Also among the mourners were the former governor of the Bank of Ireland, Laurence Crowley, and the former chief executive of AIB, Michael Buckley. The presence of these two giants of Irish banking served as a reminder that Alex Spain was not just an ace accountant. He had been chairman of a major bank himself.
Spain had chaired National Irish Bank at an embarrassing time. In 1998, High Court inspectors had been sent in to probe accusations of overcharging and tax evasion.
Much of the blame in the eventual inspectors’ report (2004) was heaped on the shoulders of NIB’s chief executive, Jim Lacey. Many years later – in 2011 – Lacey was disqualified by the courts from any involvement in the management of any firm for nine years, as a result of the findings regarding his management of NIB.
Spain had been a strong supporter of Lacey, but he managed to escape much of the ignominy attached to Lacey’s activities – even though he was chairman of the board, and of the audit committee, at the time the scandals broke. The High Court inspectors merely delivered a token rebuke in his direction, branding his audit committee as ‘remiss’ for failing to ask management to quantify the possible liability arising from NIB’s non-collection of DIRT tax.
Many years earlier, after Spain had been called before the Dáil’s Public Accounts Committee to explain why NIB had been cheating on DIRT tax, the PAC’s report pointedly headed the section about Alex Spain ‘Mr Spain’s Lack of Knowledge’. The former chairman had simply pleaded that he knew little or nothing about non-compliance with DIRT. Somehow, it had worked. Spain slipped away from the NIB chair in 1999, after ten years at the helm, virtually untouched.
Laurence Crowley was just one of four former SKC/KPMG managing partners at Spain’s funeral – John Callaghan, Ron Bolger and Jerome Kennedy were there as well, as was the current managing partner, Terence O’Rourke. National Irish Bank’s auditors, who had failed to question NIB’s DIRT liabilities, were none other than KPMG. The blue-blooded accountants were not spared from criticism in the report. A pattern had been established. In the eighties and nineties, Spain became chairman of three companies audited by KPMG. His old firm did the audit. He chaired the board. And the companies landed in trouble.
Jim Flavin, deposed chief executive of conglomerate DCC, was another of the mourners paying their last respects to Alex Spain on that chilly January morning. Flavin’s career path and background were strikingly similar to Spain’s: both men had been at Blackrock College, both were at UCD and both qualified as chartered accountants. Flavin’s chairman at DCC was none other than Spain, who served thirty years in the post – a longevity of service that presented an open challenge to the code of corporate governance.
Flavin will forever be known as the guy whom the Supreme Court found guilty of unlawful insider dealing in the shares of Fyffes. His sale of DCC’s shares in Fyffes was carried out in February 2000, when Spain was chairman. In 2002 Fyffes sued DCC over the sale, alleging insider dealing. A High Court verdict of not guilty was given in December 2005. The case lifted the veil on some of the less savoury activities in Irish corporate life, neither side emerging with credit. At all times Spain backed Flavin to the hilt.
Fyffes appealed the High Court decision to the Supreme Court, which overturned the High Court’s judgement. DCC was forced to pay Fyffes more than €37 million in compensation. Spain had by this time vacated the DCC chair, but the DCC board, stuffed with stars of the ‘golden circle’, brazenly resolved to eyeball the Supreme Court and to back Flavin as chief executive despite the adverse finding of the highest authority in the land. At the end of the day, a specially appointed High Court inspector – barrister Bill Shipsey – stunned the corporate world when he pronounced that Flavin ‘genuinely believed’ he was not in possession of inside information when he sold the Fyffes shares. Although Alex Spain had retired by the time the Supreme Court gave its final verdict against Flavin, he was in the chair at the time of Flavin’s offending transaction, and he had stood by him.
What was it that made this man – who had been associated with Jim Lacey, Larry Goodman, Liam Lawlor, Jim Flavin, Ansbacher account holders and the disastrous Xtra-vision – an untouchable and a pillar of the Irish business establishment?
How could a man with such sulphurous associations rise to the top of KPMG and secure the chair of so many Irish public companies?
How could one of his obituaries have described him as ‘a rock of reason’ who ‘achieved all that he did through hard work and a belief in considered, rational decision-making’?
Welcome to official Ireland.
In January 2010, having served three and a half years as secretary general of the Department of Finance, David Doyle retired from the civil service. Doyle’s tenure as the head of the department had seen a catastrophic collapse in the Irish economy and in the public finances. The state had guaranteed the liabilities of the banking system, and then nationalized it, incurring obligations it might never be able to discharge. Before the end of the year, as a result of these developments, Ireland would no longer be able to borrow money on the open market, and would require an onerous bailout from the EU and the IMF.
You might think that everyone concerned would agree that the next secretary general of the Department of Finance should be a man or woman who had not had any part in the comprehensive failure of policy and regulation that had created the disaster. You would be wrong. There were three second secretaries in the department (the most senior officials after the secretary general). Doyle’s replacement was the second secretary who ran the taxation and financial services division. His name was Kevin Cardiff. The departmental press release announcing Cardiff’s appointment noted: ‘As the financial crisis developed over the past 18 months’ – in other words, since the summer of 2008 – ‘Mr Cardiff was asked to concentrate solely on financial services matters.’
Doyle meanwhile retired with a gold-plated pension package, made up of a €343,000 lump sum and a €115,000 severance ‘gratuity’ payment. His annual pension is worth €115,000 per year.
The then Minister for Finance, Brian Lenihan, later revealed that the three secretaries general who had retired from the Department of Finance since 2005 had been paid a combined total of €386,478 in ‘severance gratuities’. These payments were on top of chunky retirement lump sums of between €260,000 and €343,000 each. The department also shelled out €2.5 million in lump sums and other pay-offs to eight other high-ranking civil servants who retired over the same period.
The national economy was shot, the public finances were in ruins, but they were untouchable. Kevin Cardiff, the new secretary general, with his salary of €303,000 per year, was also untouchable.
To get a true sense of how the most important of the government departments operates, it is useful to look back to the good old days when the economy was booming and the state’s coffers were brimming over.
In March 2002 the government appointed Tom Considine as secretary general of the Department of Finance. Fianna Fáil’s Charlie McCreevy was minister at the time. Considine’s predecessor, John Hurley, had just become governor of the Central Bank. It was something of a tradition for former secretaries general of the Department of Finance to make the move to the big building on Dame Street. With a top-grade salary of €348,000, lots of foreign travel and excellent nosh at some of the continent’s top restaurants, there was plenty to like about running the Central Bank.
Considine was a ‘lifer’ at the Department of Finance, having joined in 1974, when he was in his twenties. His career had seen him serve as secretary general of the Public Service Management and Development branch of the department from 2000 until 2002. This was the part of the department that drove the flawed strategy of benchmarking during that period, which led to cavalier pay hikes for the public sector and has left Ireland in the unsustainable situation whereby the head of our 13,000-strong defence forces earns €189,114 – almost as much as the chairman of the Joint Chiefs of Staff of the US military. Or where the Garda commissioner takes home €185,000 a year – some €29,000 more than the chief of police in New York City. Wage increases of 5.2 per cent in 2001 and 5.1 per cent in 2002 were running at more than double the Eurozone average, and Ireland’s competitiveness suffered. Considine was also part of an Implementation Advisory Group which proposed the creation of the ill-fated Office of the Financial Regulator – a semi-autonomous offshoot of the Central Bank that would sit idly by while the country’s banks ran themselves into the ground at an eventual cost of tens of billions to the public.
Now, as secretary general, Considine had even more responsibility. As well as serving on the board of the Central Bank, Considine was also appointed to the Top Level Appointments Board, which determined which candidates got the most important civil service jobs. He also joined the board of the National Treasury Management Agency (NTMA). Considine was at the absolute centre of the finances of the country. He was the most powerful civil servant in the country.
In the twelve months to May 2003, Irish property prices jumped an incredible 14.2 per cent, fuelled by madcap bank lending. Residential mortgage lending increased by a frankly insane 23 per cent in 2003 alone. Red lights should have been flashing about an overheating market. However, these issues were overshadowed by the fact that the economy was growing at a phenomenal rate. Ireland appeared to be flying. But it was hopped up on artificial stimulants. Ireland’s manufacturing trade surplus, which had grown from the mid-1990s onwards, began to decline from 2002, with imports rising sharply. The growth in the economy was becoming more and more dependent on the domestic construction market and on consumer borrowings. The three years up to 2006 marked the craziest period of growth, with loan assets increasing at a rate of nearly 28 per cent per year. The Nyberg Report into the banking crisis reported how the Central Bank Financial Stability Report of 2005 pointed to potential issues over soaring property prices. An internal Department of Finance briefing note for Brian Cowen concluded that ‘all evidence is that systemic risk … to the financial system from a downturn in the property market is relatively limited’.
Considine’s four-year term ended in July 2006. He left with his head held high. The top-line figures suggested that the Irish economy was one of the best performers in the world.
The following February, the Sunday Independent revealed that Considine had joined the board of Davy Stockbrokers. There was no public announcement, just a discreet regulatory filing in the Companies Registration Office. This was the same Davy Stockbrokers that was overseen by the Financial Regulator he had helped establish, and the same Davy Stockbrokers that made massive profits as one of the primary dealers in sovereign bonds issued by the NTMA, on whose board Considine had been serving.
The move was contrary to the rule specifying that civil servants could not take jobs in the private sector for at least a full year after leaving the service of the state. The purpose of the rule was to prevent potential conflicts of interest, and to put the brakes on a revolving door between the regulators and the regulated. But Considine had been given a special exemption, granted by the Civil Service Outside Appointments Board. At the time, the board was made up of Considine’s former colleague Eddie Sullivan (who had replaced him as secretary general of Public Service Management and Development), Dermot McCarthy (secretary general of the Department of the Taoiseach), Peter Malone (of the National Roads Authority) and Breege O’Donoghue (a top executive at Primark and Penneys). O’Donoghue also served on the board of drinks group C&C, which was headed by Tony O’Brien – who also chaired the Review Body on Higher Remuneration in the Public Sector.
Considine was allowed to join the masters of the universe at the state’s largest stockbroking firm, but only ‘on condition that for the following six months, he would not engage in any matter in respect of which a state or state-owned body was a client’. The special dispensation for Considine was, as far as we can tell, unique – the one and only time we have uncovered when the rules have been waived for a top-level civil servant joining the private sector. The Department of Finance declined to say whether or not other similar exemptions have been granted.
In 2009, following the collapse and nationalization of the Irish banking system, Brian Lenihan appointed Considine as one of the public-interest directors on the board of Bank of Ireland. His job was to bat for the taxpayer as the bank received billions in state funding – money that could have gone to schools or hospitals instead. Considine joined the bank’s audit committee and chaired its risk committee. He resigned from the board of Davy to take the position, which paid well: Considine received €90,000 in 2010.
Since the fateful night of the bank guarantee in September 2008, Bank of Ireland has received €7 billion in state support to save it from going bust. It has not shown much gratitude in return. Just before receiving €3.5 billion from the state in 2010, the bank told Lenihan that it hadn’t paid any bonuses in 2009. Not a cent. The Minister for Finance stood up in front of the parliament of this country and told us that no bonuses had been paid. Except they had: Bank of Ireland later confessed to having paid €66.4 million in bonuses. Here was a bank (that had been kept alive by the state) pulling an outrageous fast one. A subsequent report found that the bank had ‘a restrictive and uncommon interpretation of what constituted a performance bonus’. In other words, it was playing fast and loose with the truth. Hardly in the public interest. Considine and his fellow state-appointed director – former Agriculture Minister Joe Walsh – should have walked in protest.
Considine’s replacement as secretary general of the Department of Finance in May 2006 was David Doyle. The workmanlike Doyle had joined the department in 1976, after a stint at Texaco and four years at the Department of Education. After twenty years in the trenches, he made it to the elite levels of the department, becoming an assistant secretary in 1996. He spent three years in the budgetary and economic division before moving over to the banking, finance and international division. Then he moved into the public expenditure division at the Department of Finance before bagging the top job.
Civil servants are paid in various salary bands and grades. Doyle was the only secretary general in the country with his very own pay grade. He was given an annual pay package of €303,000 when he took the job – almost ten times the average industrial wage. (Dermot McCarthy, then head of the Department of the Taoiseach, was subsequently moved up to this super grade in late 2007.)
Doyle’s tenure as the civil servant with the most influence over the economy will go down in history as an absolute catastrophe. While he was at the wheel of the Department of Finance, the property bubble hit new heights before bursting, the banking sector collapsed, the state got bounced into a poorly thought-out blanket guarantee of the banks’ liabilities, a misguided tax strategy emptied state coffers and the country’s disastrous economic situation saw it forced to seek help from the IMF and EU. The mandarins would be quick to point out that the government of the day is directly responsible for fiscal policy and ultimately responsible for regulation and everything else. But there is no evidence that the Department of Finance made any serious attempt to guide the government towards less ruinous policies.
The economy was heading for the rocks but there was still time to change direction. Brian Cowen’s December 2006 Budget threw petrol on the property market with the introduction of more tax reliefs and the decision to remove further low earners from the tax net. These changes meant that the Exchequer was even more dependent on VAT, stamp duty and other demand taxes. Social welfare payments were upped, with child benefits, pensions and other benefits increased. It was a naked exercise in vote grabbing. The 2007 general election was looming. The economy began to splutter in 2007, property prices stopped rising and then started to fall, and a global credit crunch posed a direct threat to the business models of the Irish banks, which were crazily dependent on interbank lending. This is where the Department of Finance should have stepped in; contingency plans and worst-case scenarios should have been examined, and the economy prepared for a shock. It didn’t happen.
When he stepped down, aged sixty, in February 2010, David Doyle was given a pension top-up worth €725,000 in added years. The Department of Finance confirmed that Doyle, who had worked for thirty-eight years in the civil service, was given the maximum pension available to those who had served forty years in the civil service. A departmental spokesman described the top-up as ‘fairly small’. Tell that to the tens of thousands in negative equity, or those facing HSE cutbacks.
One would be forgiven for thinking that officials should have seen the crash coming. In June 2005, the Economist warned that Ireland had a major property bubble. We know that the department paid €7,050 a year for 42 subscriptions to the magazine in 2010 – one for every 15 members of staff. Surely someone of consequence in the department was reading it in 2005? And yet, the department’s record for economic forecasting and reading the tea leaves was hopeless. During the boom years, it was a source of mild amusement that the highly paid civil servants couldn’t get within an ass’s roar of correctly forecasting tax revenues. In 1997 the department predicted that Ireland would have a budget deficit of around €113 million for the following year. Twelve months later, Charlie McCreevy announced a surplus of €1.06 billion. McCreevy just laughed it off. Mistakes like that didn’t matter if the economy was flying.
When the economy stalled in 2001 and 2002, the Department of Finance was caught with its pants down. By the start of the summer, it emerged that tax receipts were looking much weaker than expected, but the department still insisted that things would pick up later in the year. In June 2002, Richard Bruton, then the Fine Gael finance spokesman, accused McCreevy of ‘covering up’ his department’s inability to forecast correctly. Five months later, the department admitted that there would be a hole in the country’s budgetary projections of €700 million or more for the year, due to an unexpected drop in tax receipts. The mini-recession of 2001–2 should have been a massive wake-up call for the department, revealing how dramatically a changing economic situation could affect the public finances and highlighting the need to prepare for the unexpected.
Instead, they went out to lunch. The economy heated up again, and Ireland entered the ruinous second phase of its boom, a period when the economy was driven almost solely by the construction and property sectors. The growth was dramatic and unsustainable – but as late as June 2007, the Department of Finance was still predicting a ‘soft landing’, with Finance Minister Brian Cowen spouting terrible guff in his Dáil speech on the Finance Bill: ‘Our economy is set fair to enjoy strong growth rates over the medium term, albeit at a lower level than enjoyed over the past ten years. By accepting that more moderate outlook now, we can make it a reality and enjoy the much talked of “soft landing”.’ The mood was so buoyant that the department spent €3,227.75 on a ‘post budget function’ at Doheny and Nesbitt’s pub in December 2007.
The department’s forecasting was merely embarrassing. Its failure to recognize or react to icebergs looming on the horizon was catastrophic. There was no shortage of warnings: in 2005 the Department of the Environment wrote to the Department of Finance expressing concern over 100 per cent mortgages, which were being introduced by the likes of Ulster Bank and Permanent TSB. It feared that a fall in house prices could leave borrowers exposed. But the Department of Finance pooh-poohed these concerns, according to correspondence released to the Irish Times under the Freedom of Information Act in October 2011. An official replied claiming that many first-time borrowers were already getting 100 per cent financing from a variety of sources, including top-ups from the credit unions or from parents. The Merrion Street civil servants decided that moves to try to restrain the provision of 100 per cent mortgages would not be ‘appropriate’.
Robert Pye, now a retired assistant principal at the department, wrote and circulated not one but seven papers in 2004 and 2005 warning, as he put it in one of them, that ‘a major global shock could have a devastating impact on both our fiscal position and our banking system’. Pye also met with three assistant secretaries of the department in October 2004 to highlight his fears. He suggested that the Department of Finance should build up a stockpile of cash through the boom years to be used in case the economy crashed or slowed substantially. Pye was told that his concerns were ‘legitimate’ but ‘simply untenable on political grounds’.
In January 2007, Pye sought to have an article published in the Irish Times warning about what would happen to Ireland if the country was faced with a sudden outside shock from the global economy. It was just two months before the first BNP hedge funds imploded in the US, signalling the onset of the global banking crisis. Pye’s article brought an instant smack on the knuckles from his superiors. He received an official written notification from the department censuring him and ordering him not to submit the final article.
According to a 2011 story by Harry McGee in the Irish Times, in July 2007 the Department of Finance ‘rejected’ the UCD economist Morgan Kelly’s published warnings of an impending property collapse. In a memo to Finance Minister Brian Cowen, John McCarthy, an economist in the department, prepared ‘speaking points’ for Cowen, including the assertion that people ‘must be careful that we do not overreact to the current easing from the very high levels of activity’ in the housing market.
According to McGee: ‘The two-page document is the only record held by the department that deals with a spate of warnings about a property bubble made by a small number of economists during 2006 and 2007.’ In other words, the documentary record suggests that the department did not take the issue seriously – except insofar as the warnings might affect public opinion.
In April 2012, Sunday Independent reporters Danny McConnell and Tom Lyons revealed how Maria Mackle, a mid-ranking official in the Department of Finance, had consistently raised serious concerns over the property market from 2005 onwards. She had compiled official responses to parliamentary questions submitted by TDs in which she outlined the real risks posed to the economy by an overheating property market. These responses were suppressed or seriously watered down by her superiors in the department. Emails from Mackle to her superiors were contained in a file submitted to the Public Accounts Committee. In January 2005 she emailed her immediate superior, Barra O’Murchada (who has since retired):
Barra, I have reservations about the minister ignoring the possibility of a housing crash. I do have reservations about the final reply but am doing as directed in accordance with procedure.
In 2006, Mackle also raised concerns about the government’s tax strategy, which was unwisely skewed towards property and other demand-related taxes. She pointed to criticism of Ireland’s tax policy by the ESRI, the IMF and the OECD. Departmental principal officer Ronnie Downes responded:
As regards the recommendations of the OECD and others about tax policy, I would recommend against making any reference to this issue in the PQ [parliamentary question]. It does not appear germane to the question and it is a sensitive policy area in any event.
In May 2006, Mackle was involved in preparing responses to a parliamentary question that had been submitted by Paul McGrath, a Fine Gael TD. In email correspondence with assistant secretary Derek Moran and assistant principal Paul Shannon about the McGrath query she told her superiors at the Department of Finance:
Two replies have been drafted. The first contains material from Paul [Shannon] which is as close as I can get to the official position. The second represents what I perceive to be a more accurate reply but may be unacceptable to the department. I have serious doubts and reservations about the past official position on the housing market.
Derek Moran would later email her telling her to leave her personal opinions out of any future responses. A month later, Moran would instruct Mackle how to respond to a query from Labour’s Joan Burton about the economy.
Go back to them and say this … the large increase in new housing supply will restore equilibrium to the market … There is a broad consensus amongst commentators that the most likely outcome for the housing market is a ‘soft landing’. The government continues to run a prudent, stability-orientated budgetary policy …
A speech Mackle drafted for Finance Minister Brian Cowen that year drew upon the ESRI’s medium-term forecast, which warned of spiralling house-price inflation that heightened the risk of ‘default on residential mortgages, thereby exposing the banking sector’. Senior civil servants were horrified by these forecasts. A more senior official than Mackle wrote:
Marie,
This type of material is not appropriate or suitable for a ministerial speech. It is positively alarmist in tone in some areas … Similarly, I don’t see why we want the minister to make a statement to the effect that house-price inflation may continue to accelerate in 2006.
The department’s main concern here was not with the accuracy of the ESRI’s projection; it was with the supposed danger of alarming the public. Mackle has claimed that her career suffered because of her constant questioning of the departmental line. Her superiors continued to prosper, though, despite their utter failure to recognize the iceberg approaching.
The 2008 bank guarantee was the most disastrous financial decision ever undertaken by an Irish government. The move to make the taxpayer liable for the debts run up by out-of-control bankers has cost some €62 billion to date. The guarantee was conceived in haste by people who seem to have had no conception of how expensive it would prove.
A banking crisis had been coming up fast in the rear-view mirror for two years. Property prices had been falling at a dramatic rate, and the global credit crunch was causing serious liquidity problems at the credit-hungry Irish banks. In September 2007, there had been a run on Northern Rock with panicked British customers queuing for hours in an attempt to withdraw their life savings from the shattered bank. It didn’t take long to freak out Northern Rock’s thousands of Irish customers, and soon RTÉ was broadcasting images of long queues snaking around the corner of Northern Rock’s Irish branch at the top of Dublin’s Harcourt Street. Northern Rock’s troubles had begun because the bank could no longer get the interbank funding it needed to keep its mortgage-lending business going. The implications for the Irish banks ought to have been obvious.
That year ended with Brian Cowen’s Budget forecasting ‘reasonably impressive’ economic growth of 4.75 per cent for 2008. The Department of Finance figures led Cowen to announce a huge increase in government spending. According to the minister’s speech: ‘We need nearly 5 per cent more in 2008 compared to 2007 just to stay where we are.’ This was simply nuts. Was no one watching what was happening out in the real world? Even before the collapse of Bear Stearns in March 2008 and the global crisis caused by the failure of Lehman Brothers in September of that year, the Irish banks were in serious trouble.
Once Lehman’s went, the Department of Finance and advisers ranging from Merrill Lynch, Goldman Sachs and Arthur Cox started burning the midnight oil. Civil servants were even working on weekends. By the end of September 2008, the bank guarantee had been announced, with the state backstopping €440 billion in deposits and bonds. Four months later, Anglo Irish Bank had been nationalized and AIB, Bank of Ireland, Irish Nationwide and the EBS would be rescued by the state. A crippling recession, massive unemployment and a yawning gap between tax revenues and government spending would flatten the country, ultimately leading to the IMF/EU bailout and the loss of economic sovereignty.
Where had the Department of Finance been?
The role of David Doyle, Kevin Cardiff and other Department of Finance officials in the decision, at the end of September 2008, to guarantee the liabilities of the six Irish banks is highly obscure. As was their role in the department’s failure to head off the catastrophic economic crisis. Two reports were compiled into the near collapse of the banking sector – one by former Finnish central banker Peter Nyberg, the other by former Canadian civil servant Rob Wright – which focused on the performance of the Department of Finance. The Nyberg Commission’s report stated:
A majority of the people interviewed by the Commission indicated that they saw no major problems except lack of liquidity until the end of 2007, at the earliest, and autumn 2008, at the latest. The reasons given were usually very similar, the most prevalent being: property prices in Ireland had never decreased markedly; everybody expected a ‘soft landing’ at worst; loan portfolios appeared sound; property credits were diversified by country or county or class; peer banks abroad did the same thing; and ‘nobody told them’ there was a potential problem.
The Nyberg Commission’s efforts to determine what happened on the night when the bank guarantee was hastily agreed were:
… complicated by the general lack of written records as to what transpired during the official discussions. While … there is some documentation available on various broad approaches that were examined in general terms in the course of 2008, the Commission is not aware of any official record of specific alternative options or policy preferences presented to the Government on September 29 by the three main authorities involved (the Central Bank, the Financial Regulator and the Department of Finance).
The absence of a paper trail detailing how and why the infamous decision was taken may have been prompted by the ‘pressure of events’, according to Nyberg:
… but is nonetheless regrettable, since it seriously complicates allocating specific responsibility with respect to a major policy decision with far-reaching financial consequences for Ireland.
This is one of the understatements of all time. We still do not know for certain how much pressure was put upon the government and the Department of Finance by the bankers or whether other approaches – such as a more limited guarantee or nationalizing Anglo Irish Bank – were considered in detail.
In October 2008, the Department of Finance became aware of a series of unusual deposits between Anglo Irish Bank and Irish Life & Permanent after an NTMA official noticed a reference to it in a report on the banking sector by PricewaterhouseCoopers. The net effect of the transaction was to make Anglo’s balance sheet look €7.5 billion healthier than it actually was. Kevin Cardiff was informed and the Financial Regulator was informed. But Cardiff’s boss, Finance Minister Brian Lenihan, wasn’t told. Testifying at a hearing of the Public Accounts Committee, Cardiff said there ‘wasn’t a red flag’ raised on the transaction. Lenihan later said that he hadn’t read the passage in the PwC report and that he was only told about the transaction several months later. PAC chairman Bernard Allen described as ‘incredible’ the fact that all this had been allowed to go on without ‘the controlling hand of the department’.
The Department of Finance’s failure to grasp the significance of the Anglo/IL&P transaction – or see that the banks faced a solvency crisis rather than mere liquidity problems – shows that it was miles out of its depth. The failure to understand the nature and extent of the banks’ troubles, even after the guarantee had been agreed, translated into a failure to recognize the shocking costs that would be borne by the public. Cardiff gave a private briefing that autumn to officials from the US embassy in Dublin. Confidential cables from the US embassy back to Washington later published by WikiLeaks revealed that Cardiff told the officials that the banks would not have to be bailed out. A ‘herd mentality’ based on ‘rumour and innuendo’ had, according to Cardiff, created the urgent need to backstop the banks and guarantee deposits. Cardiff also ‘pointed out that auditors contracted by his department to look at the books of at least two of the institutions came away with “a favourable impression of the loan books”.’
The US official sending details of the meeting back to the State Department in Washington noted that Irish authorities might be ‘a bit optimistic’ about the financial sector’s prospects and would have their ‘work cut out’ to rebuild it. That a diplomat from another country – without access to the data – had a better idea of what was going on in banks than the top people in the Department of Finance pretty much says it all.
In July 2009, the Department of Finance revealed that tax receipts for the full year would be €3 billion less than it had reckoned at the start of the year. Two months later that figure was revised to a €5 billion shortfall. The increasingly sweaty bean counters had another stab at the data in October when they estimated that tax receipts would be €6.5 billion down on estimates. The final year-end totting up revealed how dismally inaccurate their predictions had been: tax receipts ended up being €8 billion short of expectation. It was the most inaccurate economic forecast ever produced by a government department in the history of the state – and that is saying something.
There are clearly some very smart and extremely able people in the Department of Finance. They just didn’t have their hands on the tiller. Some civil servants consistently warned about the prospect of a property bubble, but their fears were rejected by more senior officials. We’ll never know what would have happened if the top civil servants had experienced a moment of clarity and actually recognized the problems facing Ireland. Even as late as 2007, genuine awareness and decisive action would have made a difference. At the very least, if the department had understood what was going on, it – and the government – would not have been caught in the headlights in September 2008. It would have understood the scale of the disaster about to hit the banks’ balance sheets, and surely would not have countenanced a blanket guarantee of liabilities worth hundreds of billions of euros. Without the guarantee, and the massive state debt it has brought, it’s far less likely that we would have needed an IMF/EU bailout. If the brakes had been put on the property market before the crash, fewer people would be stuck in the prison of negative equity. Ireland might be in a recession, but not a generation-crushing recession. But the red flags were ignored.
Finnish central banker Peter Nyberg’s report into the banking debacle, after a series of hearings in March 2011, contained some useful findings but pulled its punches. The disaster wasn’t anyone’s fault in particular. ‘The Commission has not and could not assess the actions or inactions of particular individuals in the authorities and did not think it was appropriate or fair to do so,’ it noted. Nyberg was advised by a special committee of fourteen specially selected individuals ranging from banking and the civil service. Two members of the committee came from the Department of Finance itself.
Nyberg found that the Department of Finance’s greatest flaw was that it was just too meek.
The Central Bank (CB) and the Financial Regulator noted macroeconomic risks and risky bank behaviour but appear to have judged them insufficiently alarming to take major restraining policy measures. Among all the authorities a very limited number of individuals, either in boards or among staff, saw the risks as significant and actively argued for stronger measures; in all cases they failed to convince their colleagues or superiors. Thus the authorities largely continued to accept the credit concentration in the property market and avoided forcing action on the failings in the banks. The Government actively supported the market over an extended period against the apparently fairly weak but clear opposition of the Department of Finance.
Rob Wright’s report also let the Merrion Street mandarins off the hook: ‘We have been direct in our analysis and advice, but do not accept the notion that the Department is not fit for purpose.’
Wright echoed the views of Nyberg in saying that while the Department of Finance had warned about future pitfalls, it had done so in an extremely low-key way.
The Department of Finance should have done more to avoid this outcome. It did provide warnings on pro-cyclical fiscal policy and expressed concern about the risks of an overheated construction sector. However, it should have adapted its advice in tone and urgency after a number of years of fiscal complacency. It should have been more sensitive to and provided specific advice on broader macroeconomic risks. And it should have shown more initiative in making these points and in its advice on the construction sector, and tax policy generally.
Translated into English, Wright was saying that Fianna Fáil politicians don’t react well to gentle or obscure hints; they need to be grabbed by the scruff of the neck and told that they are driving the country over a cliff.
Wright found that the department was severely lacking in technical skills. It employed plenty of people who could lunch for the country, but not enough who actually understood how the economy worked.
The Department needs to increase substantially its numbers of economists trained to Masters level or higher and add other technical capacity, especially accounting, banking and financial markets expertise. Over the next two years the Department should double its number of economists trained to Masters level. It should organize itself to engage more University recruits at that level every year.
Wright also found that the department was ‘poorly structured in a number of areas, including at the senior management level’ and ‘poor on human resources management’. The department was top-heavy and bloated with middle managers, Wright found.
The Department of Finance is unique among Civil Service Departments in that Assistant Secretaries do not report directly to the Secretary General. There is an additional level of management – Second Secretary General – between the Secretary General and the Assistant Secretaries in the Department of Finance. This arrangement blurs accountability, under-utilizes the expertise of Assistant Secretaries and helps to inhibit effective internal communications. The consequences of the neglect of this area are evident in a number of ways: insufficient commitment across the Department to performance management, skills shortages in critical areas and reporting structures at senior and middle-management levels that are far from ideal.
Wright also pointed to the insular mindset of the officials in the Department of Finance, noting ‘it does not have sufficient engagement with the broader economic community in Ireland’ and that it ‘often operates in silos, with limited information sharing’. If compiling and then understanding economic data is crucial for the management of a country’s finances, the department was snoring soundly at the wheel.
Submissions to the Wright Commission by the department emerged in the Sunday Times in June 2011. They revealed that the department was concerned that it did not have ‘a whole economy overview’ when making key decisions and that it was restrained by bureaucracy and ‘poor communication’. The department conceded that it had a ‘serious skills deficit in economics, policy analysis, accountancy and related professional competencies’. But having been so badly managed and unprepared for the economic crisis, it’s reasonable to assume that the department has put on its game face and rectified those failings in the years since the economy began to suffocate.