Carswell in 60 seconds

Simon will probably be able to digest this in a minute "flat", but no-one else should be upset if it takes them longer than that ! The title originally referred to how long my first draft took to sketch, but to finish it consumed much longer than 60 seconds.

Here is my reaction - it's not really a review - to Simon Carswell's Anglo Republic.

• The crux: Anglo directors were agreed in 2004 that the exposure to development property needed to be reduced sharply, but because the bank lending staff were "deal junkies", they ...just...couldn't
• Another explanation: Chairman Gerry Murphy said in 1995 that the aim was 30% p.a. growth. New C.E.O. David Drumm repeated this target in 2004! Large property deals were the most, um, effective route to this goal...and took the bank over the precipice
• Something that might surprise you #1: Seán FitzPatrick did not like 100% (LTV ratio) loans
• Quotation from FitzPatrick: "We never employed people to tell us why we shouldn't lend" - a bit of an exaggeration, but only a bit
• More crimes were committed during the final slide over the precipice than have previously been revealed
• As the growth "snow-balled", anything, including prudential procedures, that slowed loan approvals was characterised as "inefficient" and was dismantled, wholly or partially. Not a thought seems to have been given to macro issues of sensible lending - all "turnover vanity", little "profit sanity", so to speak. In time, no-one was left who was likely to shout "stop !" or even to hesitate to lend more
• Something that might surprise you #2: Anglo's expense ratio was only one-third of the industry average
• It is tempting to see Seán Quinn as the "real villain", but Anglo was "going down" even without his astonishing shenanigans
• Anglo - other Irish banks too - was full of people with business degrees who had trained as accountants (as opposed to bankers or economists) and who saw banking as "just selling money"
• In early 1990s, 90% of Anglo lending staff were ex-AIB
• Something that might surprise you #3: there was really no "special relationship" with Brian Cowen, or even with Fianna Fáil in general
• At least after the departure in 2005 of Tiarnan O'Mahoney, the funding discipline, such as it had been, disappeared
• The biggest omission from the book: there is no detail on how the loans to Mr FitzPatrick were actually approved e.g. who did the due diligence (if any) ?
• I was surprised at the description of personal guarantees as an "Anglo trademark". During my banking days, which ended in the mid-1980s, they were more associated with my employer, Industrial Credit Company (as it then was named). There was constant pressure on us to abandon the requirement, not just in individual cases but in principle, and by 1985 seeking them was much less prevalent as a practice. How did Anglo get away with it so easily ?
• Something that might surprise you #4: The Financial Regulator was not completely useless: at several points, he obliged Anglo to modify its behaviour

The reasons for Anglo's specific route to disaster viz.

1. the lenders' addiction to deals
2. the ludicrous growth ambitions
3. the weakness of the funding function
4. and (my own gloss) the overall shallowness of the corporate culture

prompt the (for me) obvious question to those directing the other banks, and especially AIB Group

What's your excuse ?

It Was The Lending

What really caused the Irish banking crisis ?

Although some of them made a contribution

• It wasn't the PDs
• It wasn't Charlie McCreevy
• It wasn't Bertie Ahern
• It wasn't Brian Cowen
• It wasn't "the Government" or "the politicians"
• It wasn't the Central Bank
• It wasn't the Financial Regulator
• It wasn't the ECB
• It wasn't the builders or developers
• It wasn't Lehman Brothers
• It wasn't the bonuses, or high executive pay
• It wasn't the tax-breaks
• It wasn't the hidden directors' loans
• It wasn't the "Golden Circle"
• It wasn't interest rates
• It wasn't the "Partnership process"
• It wasn't benchmarking
• It wasn't the economists
• It wasn't the tribunals
• It wasn't the "wall of €100 billion euros"
• It wasn't the EU or the Euro
• It wasn't the Bondholders
• It wasn't the Media
• It wasn't fraud
• It wasn't the house-buyers or other borrowers
• It wasn't securitisation
• It wasn't exotic derivatives
• It wasn't over-charging customers
• It wasn't "pure greed"
• It wasn't NAMA
• It wasn't even property prices

No, it was the lending. The bad lending. The giving of mis-priced loans to unworthy borrowers, over-concentrated in one sector notorious for regular "bubbles", for uneconomically sound purposes backed by inadequate "collateral" incompetently assessed and often negligently secured, if at all.

Lending money carefully has always been regarded as the "key competence" of the banking industry. Even at single-digit interest rates, it can be profitable if done well. To lend well requires diligent application of standards throughout the process. The scope for error is minuscule. If "grip is lost" across the process, disaster is not merely courted but guaranteed.

That is what happened at Irish banks in the period up to 2007.

It was the lending.

Update on Saturday, January 1, 2011 at 01:54PM by Fergus O'Rourke

Edited to add links and a reference to executive pay

Update on Saturday, January 1, 2011 at 04:03PM by Fergus O'Rourke

More links added