By Richard Smith
Dublin, by way of the proudly-named International Financial Services Centre, a sparkling new development in the old docks, is “home to more than half of the world’s top 50 financial institutions”. But as the Irish financial crisis wears on, this glitter invites unpleasing comparisons: it simply looks meretricious. What Dublin and, let’s say, Bangkok, a favoured destination for paedophilic sex tourists, have in common, is a service offering based on activities forbidden overseas. Where they differ is in the amount of money involved, but each capital makes some money out of predatory or adventurous incomers, and needs slack local laws, slack local law enforcement, and pimps and procurers (or their analogues). That’s not so very different from the business plan for the City of London after Big Bang, to be honest, or a dozen offshore financial centres, but in Ireland this variant of mercantilism been pursued with a great deal of energy and rigour, to disastrous effect, as this latest story attests, once again.
Back in September 2007 Unicredit Bank Ireland’s risk manager resigned. Firing or losing risk managers can be a very bad sign, indeed: here is another sighting at Merrill Lynch ($50Bn of CDO losses, taken over by Bank of America) and another at HBOS (losses 2008-9: £17.1Bn, part nationalised). Those two firms were train wrecks, urged to destruction by utterly reckless top management. At Unicredit, the resignation matter was a bit more technical : massive breaches of liquidity requirements (banks are required to ensure that cash inflows equal at least 90 per cent of cash outflows forecast over the relevant period). Over to Ireland’s Village magazine for the details:
In late July or early August 2007, an experienced financial risk-manager, says he discovered his employer bank – the Irish subsidiary of the giant UniCredit Bank of Italy – had been dramatically breaching the liquidity ratio. The risk-manager maintains he was specifically warned by senior personnel at the Irish subsidiary not to report the matter to the financial regulator in Ireland. On one occasion he reported a ratio of only 70% to the regulator (and obtained a receipt). In fact he says “I was getting 75%, even 65%, not occasionally but day in, day out. Banks are obliged by law to maintain all daily records for at least five years so there must be written evidence of this. At the time, I thought: ‘Is it my fault?’ Then I asked questions and I was told ‘it’s a system error’ or ‘a trader forgot to book a deal’ or ‘it’s complicated. Give it a bit more time and you’ll understand. It will be fine’”. In any event, even if taken at face value, such failures would attract penalties under Sections 3.4 and 10 of the regulator’s Requirements for Management of Liquidity Risk, 2006, which seem to impose fairly strict liability. Ascertaining the liquidity ratio is a complex task and eventually the risk-manager turned to a consulting company in London for help, affording it access to UniCredit’s systems. That company – a company which continues to provide such services for some of Ireland’s most well-known banks – calculated the liquidity ratio at an extraordinary 50% when a ratio of 89% would in normal circumstances be deemed problematic. The risk-manager resigned, in part fearful of the draconian penalties that applied for breach of the law.
Routine, in 2007’s wacky world, so far. Then the regulator made a scheduled inspection, and unsurprisingly “all hell then broke loose”. Next there’s a twist – no follow up at all once the breach had been discovered, no curiosity from the regulator whatsoever about the resignation of the risk manager, apparently no tip-off to Italian or EU regulators, either; and what appears to be a clumsy attempt to disguise the fact that there had been a regulatory breach at all:
In June 2009 the regulator issued a revision of regulations for liquidity ratios without making any reference at all to the fact that the regulations had been revised to achieve precisely this ‘new’ effect in 2006. This served deceptively to imply that the regulations had not been in force at the time of the breaches by UniCredit (and by all the other banks whose liquidity imploded illegally, though without media recognition of the illegality, around the time of the bank guarantee). The text of the 2006 document [section 9.4] which specified that the new requirements had taken effect on 1 July 2007 disappeared from the 2009 document.
Great, now the regulator’s faking his own document chain.
Questions were asked about l’affaire Unicredit in the Irish Senate back in February, meeting a stone wall.
Oh, by “all the other banks”, Village means, most particularly, Depfa (which destroyed its acquirer HRE, creating a EUR300Billion black hole), and SachsenBank, (which blew EUR17Bn at its Irish subsidiary on CDOs). And that gives a clue as to a possible motive for the possible cover up:
…if it can be shown that the regulator systematically allowed breaches of liquidity ratios, indeed still does not recognise those breaches, it could trigger litigation against Ireland by the likes of HRE (Hypo Real Estate).
HRE, was bailed out for €140bn in loans and guarantees in September 2008 by the German government, after HRE had hastily bought – heedless to its underlying liquidity problems – IFSC-based DEPFA. DEPFA’s directors then included pillars of Ireland’s economic sector including Francis Ruane, director of the ESRI, and Maurice O’Connell, former governor of the Central Bank.
If HRE had not bought DEPFA, so transferring the relevant headquarters from Ireland to Germany, Ireland would have been responsible for this colossal bailout. It is perhaps reflective of the lack of seriousness of the debate here for so long that this lucky escape from the consequences of our lackadaisical regulation, was not more widely recognised as far back as 2008.
If your foreign banks take ridiculously massive losses, or your well-heeled johns all get STDs, it gets ugly. That seems to be the story: Irish politicians as hugely embarrassed brothel-keepers. One key difference is: johns don’t sue, but banks do. So there is possibility of hundreds of billions more financial liabilities being contested in court, once some German lawyers are up to speed. That would pile a good extra chunk of uncertainty onto the already fraught Irish economic situation. Of course, potential plaintiffs would first have to conclude that someone in Ireland was actually worth suing for another EUR100Bn+.
Naturally one wonders if there are still more badly behaved banks at the IFSC…
Now a rueful footnote from me. Village remarks:
Interestingly, UniCredit in Milan has emphatically denied, to the Süddeutsche Zeitung and more recently the Sunday Business Post, that it is the bank to which Norris was referring in the Seanad.
Well, I have news for Unicredit’s rather out of touch management, in that case: since I’ve been following the story since it started, I can confirm that Unicredit is definitely the bank in question. The former risk manager first shows up in comments on a story in The Guardian on 17th November, then in a now-deleted comment to another Ireland story by the WSJ a couple of weeks later, which didn’t name the bank, but included enough detail (from memory: Italian bank with German connections, US East coast asset management sub) to identify Unicredit Ireland, unambiguously. But that sleuthing, and much of my subsequent digging into Unicredit, is moot now, since I have been scooped. I was far too slow, so here I am, adorning Village’s excellent piece. Go and read it; there is tons more on Unicredit and on the Irish financial services scene.
What’s more, the whistleblowing risk manager now even has his own blog. It also looks as if he will be accumulating related links there , so you will be able to track the story as it develops, which I think it will.