Irish Bankers Face Jail Threat on Secretive Deal to Survive

It was July 2008, markets were sinking and time was running out for Anglo Irish Bank Corp. executives as the fate of the lender that came to symbolize Ireland’s boom to bust hung in the balance.

The dilemma confronting management in their offices on Dublin’s St. Stephen’s Green was how to unwind a secret stake of about 28 percent controlled by then-billionaire Sean Quinn without a collapse in the bank’s shares. The solution: a vast set of loans to clients, known as “heroes” within the bank, to buy the stake and stop it hitting the market.

That decision, described by one executive as a drink in the “last-chance saloon,” triggered the first trial of top Irish bankers after the biggest collapse of a financial system in the euro region. Drawing together some of most storied figures of Ireland’s boom, it ended in the conviction of two officials who today face a sentencing hearing for helping organize the ultimately doomed effort to avert catastrophe.

“It’s talismanic of a wider cultural and structural problem,” said Justin O’Brien, head of the center for law, markets and regulation at the University of New South Wales in Australia and visiting professor at University College Dublin. “What this trial really does is expose just how corroded the system had become. Nobody comes out of this very well.”

Court Return

After a 10-week trial, a jury decided on April 17 that 450 million euros ($623 million) of loans to 10 customers broke the law. Today, Anglo’s former head of Irish lending, Pat Whelan, 52, and finance director Willie McAteer, 63, returned to court. The pair, who denied any wrong-doing, face maximum prison terms of five years for the charges.

Whelan said in a statement earlier in the trial that “his understanding” was that the bank’s compliance department received “positive expert legal advice” on the transaction.

Robert Heron, a lawyer at the Dublin-based law firm Matheson at the time the deal was agreed, said in court today he didn’t advise the bank on the loans to the 10 investors before they were made. He said he only found out about the payments on July 28, 2008, and learned of the terms of the agreement six months later.

The jury acquitted former Chairman Sean Fitzpatrick, 65, before finding McAteer and Whelan guilty. One defense lawyer reminded jurors that the trial wasn’t “to satisfy the baying for blood of the mob.”

Under the stewardship of the silver-haired Fitzpatrick, who once said he only joined the bank in 1974 because he couldn’t get a home loan anywhere else, Anglo became a poster child for Ireland’s Celtic Tiger economy.

Starting life as a small merchant bank in discreet offices on one of Dublin’s Georgian squares, the bank’s loans soared in the decade through 2006, as it bankrolled some of Ireland’s largest property developers.

Margin Calls

Sean Quinn, whose business empire spanning insurance to real estate had made him Ireland’s richest man, told the trial he started to build a stake in Anglo using derivatives called “contracts for difference” in 2006.

The instruments allow investors to bet on a share price by only putting up an initial deposit and without having to inform the market. Investors are asked by a broker to deposit more cash or securities to cover any losses, known as a margin call.

It was in September 2007 at a meeting with Quinn, 66, at the Ardboyne Hotel in Navan north of Dublin when Fitzpatick and his successor as chief executive officer, the balding, bespectacled David Drumm, learned for the first time that the billionaire had built his stake to 24 percent.

“It was one of those moments you never forget in life,” Anglo executive Michael O’Sullivan said during the trial.

Two months later, the Quinns were bleeding cash as Anglo’s market value dropped. The bank went on to loan the Quinn family about 2 billion euros to cover margin calls, avoiding a sale of the stock underlying his bet. Such a sale might have sent the share price plunging, undermining confidence and potentially triggering a run on deposits just months after savers lined up outside U.K. lender Northern Rock Plc to withdraw their cash.

Pressure Mounts

Within six months, the pressure to deal with the Quinn stake built after the bank’s shares fell as much as 23 percent on March 17, 2008, in what became known as the St. Patrick’s Day Massacre. The family needed more cash to cover their bets.

Another former Anglo executive, Lorcan McCluskey, told the jury that he had received a “mayday” call to go to the office that day to transfer more money to the Quinns.

The plan was for the Quinns to convert about 15 percent of their derivatives into actual shares, and scour the world for investors, such as Middle Eastern sovereign wealth funds, to buy the rest. That failed as investors fled.

Drumm, who hasn’t been charged and is in the U.S., “was the author” of the next proposal and instructed Whelan and McAteer to carry it out, Judge Martin Nolan told the jury.

Three e-mails sent to Drumm seeking comment received no response. An e-mail sent to a U.S. lawyer who acted for Drumm in his bankruptcy case also didn’t get a reply.

Pursuing Investors

Dark haired and wearing an open-necked shirt throughout the trial, Whelan joined the bank in 1989, working his way up to head lending in Ireland. McAteer joined as finance director in 1992 and moved to the lender’s board in February 2000.

The bank proposed loaning cash to 10 property developers, two of whom were pursued by Drumm and Whelan to vacation destinations in the south of France and Portugal, to buy a 13 percent stake.

The developers were among the country’s wealthiest businessmen and had borrowed from Anglo Irish as they amassed fortunes during the nation’s property boom. Their interests included office blocks in Boston, housing estates and retail parks across Ireland and the U.K. and luxury London hotels.

The 10, dubbed “heroes” by Whelan, became known as the Maple 10 after Quinn’s codename within the bank. Anglo also lent money to members of the Quinn family to turn the derivatives into a 15 percent stake.

“Last roll of the dice or last-chance saloon is a fair summation” of the strategy, Matt Moran, former chief financial officer at Anglo Irish, said in his testimony. Moran was granted immunity from prosecution.

Short Respite

The loans were set up to guarantee the recovery of 25 percent of the money given to the Maple 10, financial terms a banking expert told the jury were “extraordinary.”

Whelan told police that the lender had not sought 100 percent recourse as Drumm “felt uncomfortable” asking for that level of security given the investors were assisting the bank, according to the evidence given during the trial.

After a Saturday afternoon call with regulators, on July 12, the deal unfolded over the next two weeks. Over the next ten days, the shares rose by more than 50 percent.

The respite was temporary. The stock started to slide again in September, hastened by the demise of Lehman Brothers Holdings Inc. and the worsening state of the Irish property market.

Feted as Ireland’s top business person six years earlier, Fitzpatrick resigned in December 2008. Drumm then left, with McAteer departing days before the Irish government took over the bank in January 2009. Whelan left in December of that year.

Legal Matter

Ireland’s police and corporate law enforcement agency began an investigation into Anglo Irish in February 2009, with Fitzpatrick, Whelan and McAteer charged three years later.

While banks are allowed to lend to buy their own shares under Irish law, it must be in the ordinary course of business. Prosecutor Paul O’Higgins said the loans only occurred because the bank found itself in an “extraordinary situation.”

Judge Nolan told jurors that the financial authorities’ attitude and legal advice over whether the scheme was sound or not were irrelevant.

“That may seem unfair, but that is the case,” he said. “That is a matter of law.”

On April 16, the jury cleared Fitzpatrick, the only non-executive director charged in the case. His lawyer, Michael O’Higgins, said Fitzpatrick had been used as the “face of Anglo.” Fitzpatrick faces separate charges tied to an unrelated banking controversy.

System on Trial

The next day, the jury found McAteer and Whelan guilty of making loans to the 10 investors. They cleared the men of six charges linked to the Quinn family loans.

Sean Quinn puts his Anglo Irish losses at 3.2 billion euros, and has been declared bankrupt. “How times can change,” he told the jury. “I’ve got a right beating in the last two or three years. I’ve been a fool.”

The legacy of Anglo Irish, which is now being liquidated, still weighs on Ireland. The government is setting up an inquiry into losses in the country’s financial industry, which has cost the taxpayer at least 60 billion euros.

“It would also suit many to say that what happened at Anglo was the result of these two men, and to portray them as rogues or as being in some way an exception to the norm,” said Paul Murphy, a socialist member of the European Parliament. “In effect, as well as the bankers directly involved, the whole financial and political system should be put on trial.”

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