Sunday March 21 2010
SAINT Patrick is not a lucky patron saint for Sean FitzPatrick.
It has been a tumultuous two years for FitzPatrick. Eighteen months ago, he was super rich, still walking on water, feted by global bankers, politicians and captains of industry. Today he is broke, helping the gardai with their inquiries.
What brought him down?
Sean FitzPatrick was always a man on the make. He was an opportunist par excellence. There is little evidence of wrongdoing in his early days at the bank. Certainly he was a risk-taker; indeed he had qualities that, on their own, deserve to be applauded. Initially he went flat out to challengeIreland's established bankers, the dominant forces for decades.
His opportunism was both his greatest asset and his biggest liability. He spotted gaps in the services offered by his banking rivals. Where other banks took weeks, he was willing to offer 24-hour turnaround responses to loan applications.
Businesses large and small flocked to Sean's bank. They liked the style of the quick- fixer of St Stephen's Green. Property developers loved the fast-buck culture, the whiff of cordite from Anglo's headquarters. And they loved Seanie.
Maybe not quite as much as Seanie loved Seanie.
Seanie had spotted the lack of regulation. He realised that lending to property developers was a doddle; that the regulator was a pushover for the bankers; that politicians were in the property developers' pockets; that the Department of Finance was a paper tiger; that bankers -- the source of all this phoney prosperity -- were the new masters of the universe. And he was the king of the castle.
The scene was set for a chancer to run amok.
He even forced the stuffy old guard of Ireland's bankers to follow him into the property abyss. Titans like Eugene Sheehy of AIB and Brian Goggin of Bank of Ireland brought both their banks close to ruin in pursuit of Seanie into the property furnace.
But just as Eugene and Brian began to ape Seanie, he began to ape them.
Sean FitzPatrick grew to believe his own propaganda. He started to take bows and baubles from the business community.
The tell-tale sign was the day in 2000 when he sought -- and was awarded -- the presidency of the dreaded Irish Bankers Federation (IBF), lobbyists for the bankers during the property bubble.
No entrepreneur with an ounce of self-respect would have touched such a bauble with a bargepole. Whatever about self-respect, Sean had developed plenty of self-esteem. He grabbed the IBF gig with open arms. Vanity had taken over. He craved recognition.
And then he started to make those speeches about integrity.
Later that year he launched the bankers' Code of Ethics. His speech was staggering stuff from a banker, let alone from Sean.
"The principles of integrity," he boasted, "confidentiality, professionalism and compliance are the most basic of modern banking and we have gone to some pains to ensure that they are at the heart of this Code of Ethics. . . Trust is important to us and we are determined to rebuild it."
Two years later in 2002, he was made the Business & Finance Person of the Year. He relished such recognition, including his later elevation to the highest echelons of the Institute of Chartered Accountants of Ireland. He was basking in recognition from such useless outfits.
Sean the outsider was on the inside track of Irish business. Simultaneously he was revered by naive politicians. So revered that in 2004, Minister for Transport Seamus Brennan asked him on to the board of the semi-state Aer Lingus where he became the senior independent director (commonly known as SID).
The SID's job is to promote high standards of corporate governance.
It would be fascinating to know how Sean squared his duties as the policeman of high standards of corporate governance at Aer Lingus with the low standards of corporate governance at his first love, Anglo Irish Bank.
Despite disapproval of such a move in the corporate code, in 2005 his leap from chief executive to the chair at Anglo was allowed by a compliant board.
He was the master of cross-directorships. He sat on the board of the controversial Dublin Docks Development Authority (DDDA), along with fellow Anglo director and business partnerLar Bradshaw. He held a seat on the board of Greencore, was a director of Aer Lingus and chaired Smurfit Kappa.
In turn, Greencore chair Ned Sullivan and Smurfit chief executive Gary McGann adorned the top table at Sean's Anglo. He was flaunting his contempt for the rules of corporate governance, aimed at stopping too much power falling into the hands of one individual.
He is living proof that the tedious code of corporate governance is there for a good reason. Specifically, when a strong character emerges, he can become a corporate despot.
Sean's talks with the gardai may or may not lead to further developments. That is hardly the point of the FitzPatrick story. After achieving great wealth he became intoxicated with the adoration of fawning business audiences. He relished the attention attracted by his after-dinner speeches.
Even after the darkest day -- September 30, 2008 -- when the bank guarantee rescued him and his colleagues from oblivion, he wanted to go out and sock it to the masses. Less than a week later, he did a disastrous interview with RTE's Marian Finucane when he refused to apologise for bankers' reckless behaviour.
Instead, he rubbed salt into the wounds of those taxpayers whom the bankers had wronged. At that critical time, an opportunity for humility and reticence, he was gagging to go public.
The same evening he was the guest speaker at a formal dinner in Greystones where he lectured the assembled diners on the need to review both child benefit and medical cards for the over-70s. He wanted to take money out of the pockets of the oldest and the youngest in Ireland.
A few days later, I heard him speak to a business dinner in Dublin. It was the same self-satisfied speech: the Anglo story and how Sean had built the bank from humble beginnings to the success story it was on that day.
Which, of course, it was not. It was toppling as he spoke. He was living on Planet Hubris.
Within two months, Sean had resigned. Within three months, Anglo was bust and nationalised.
No one can walk on water. Not even Sean FitzPatrick on St Patrick's Day.
- Shane Ross
Peter Boone is chairman of the charity Effective Interventionand a research associate at the Center for Economic Performance at the London School of Economics. , a senior fellow at the Peterson Institute for International Economics, is the former chief economist at the International Monetary Fund.
As Greece acts in an intransigent manner, refusing to move decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably. Ireland is seen as the poster child for prudent fiscal adjustmentamong the weaker euro zone countries.
The Irish economy is in serious trouble. Irish gross domestic product declined 7.3 percent in the third quarter of 2009 compared with the third quarter of 2008. Exports were down 9 percent year on year in December. House prices continue to fall.
While stuck in the euro zone, Ireland’s exchange rate cannot move relative to its major trading partners. Thus, it cannot improve competitiveness without drastic private-sector wage cuts. Yet investors are so pleased with the country that its bond yields imply just a 1 percent greater annual chance of default than Germany over the next five years.
Ireland’s perceived “success” is partly due to its draconian fiscal cuts.
The government has cut take-home pay of public-sector workers by roughly 20 percent since 2008 through lower wages, higher taxes and increased pension payments. As the head of the National Treasury Management Agency, John Corrigan, proudly advised the Greeks (and everyone else), “You have to talk the talk and walk the walk.”
So is Ireland truly a model for Greece and other potential trouble spots in Europe and elsewhere?
Definitely not. But it does provide a cautionary tale regarding what could go wrong for all of us.
Ireland’s difficulties arose because of a vast property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up 2.5 times the country’s G.D.P. in loans and investments by 2008; these are big banks (relative to the economy) that pushed the frontier in terms of reckless lending.
The banks got the upside, and then came the global crash in fall 2008: Property prices fell over 50 percent, construction and development stopped, and people started defaulting on loans. Today roughly one-third of the loans on the balance sheets of banks are non-performing or “under surveillance”; that’s an astonishing 80 percent of gross domestic product, in terms of potentially bad debts.
The government responded to this with what are now regarded — rather disconcertingly — as “standard” policies.
They guaranteed all the liabilities of banks and then began injecting government funds. The government is now starting a new phase: It is planning to buy the most worthless assets from banks and give them government bonds in return. Ministers have also promised to recapitalize banks that need more capital.
The ultimate result of this exercise is obvious: One way or another, the government will have converted the liabilities of private banks into debts of the sovereign (i.e., Irish taxpayers).
Ireland, until 2009, seemed like a fiscally prudent nation. Successive governments had paid down the national debt to such an extent that total-debt-to-G.D.P. was only 25 percent at the end of 2008. Among industrialized countries, this was one of the lowest debt ratios.
But the Irish state was also carrying a large off-balance sheet liability, in the form of three huge banks that were seriously out of control. When the crash came, the scale and nature of the bank bailouts meant that all this changed. Even with the now-famous public wage cuts, the government budget deficit will be an eye-popping 12.5 percent of G.D.P. in 2010.
The government is gambling that annual G.D.P. growth will recover to over 4 percent starting in 2012 — and it still plans further major spending cuts and revenue increases each year until 2013, to bring the deficit back to 3 percent of G.D.P. by that date.
The latest round of bank bailouts (swapping bad debts for government bonds) greatly compounds the fiscal problem. The government will in essence be issuing one-third of G.D.P. in government debts for distressed bank assets that may have no intrinsic value. The government debt-to-G.D.P. ratio of Ireland will be over 100 percent by the end of 2011 once this debt is included.
Ireland had more prudent choices. It could have avoided taking on private bank debts by forcing the creditors of these banks to share the burden — and this is now what some sensible voices within the main opposition party have called for.
But a strong lobby of real-estate developers, the investors who bought the bank bonds, and politicians with links to the failed developments (and their bankers) have managed to ensure that taxpayers rather than creditors will pay. The government plan is — with good reason — highly unpopular, but the coalition of interests in its favor is strong enough to ensure that it will proceed.
Investors may wish to remain pleased today with Ireland, but Ireland’s “austerity” — reflecting an unwillingness to make creditors pay for their past mistakes — hardly seems a good lesson for Greece, the euro zone or anywhere else.
Countries — like the United States — with large banks prone to reckless risk-taking should limit the size of those banks relative to the economy and force them to hold a lot more capital. If you thought the “too big to fail” issues of 2008-9 were bad in the United States, wait until our biggest banks become even bigger.
Today the big six banks in the United States have assets over 60 percent of G.D.P.; there is no reason why they won’t increase toward Irish scale.
When Irish-type banks fail, you have a dramatic and unpleasant choice. Either take over the banks’ debts, which creates a very real burden on taxpayers and a drag on growth, or restructure their debts, which forces creditors to take a hit. If the banks are bigger, more powerful politically and better connected in the corridors of power, you will find the creditors’ potential losses more fully shifted onto the shoulders of taxpayers.