29/04/2015: Michael Buckley – Former Group Chief Executive, AIB

AN COMHCHOISTE FIOSRÚCHÁIN I DTAOBH NA GÉARCHÉIME BAINCÉIREACHTA

JOINT COMMITTEE OF INQUIRY INTO THE BANKING CRISIS

The Committee met at 09.30 a.m.

MEMBERS PRESENT:

Deputy Pearse Doherty,	Senator Sean D. Barrett,
Deputy Joe Higgins,	Senator Michael D’Arcy,
Deputy Michael McGrath,	Senator Marc MacSharry,
Deputy Eoghan Murphy,	Senator Susan O’Keeffe.
Deputy Kieran O’Donnell,
Deputy John Paul Phelan,

DEPUTY CIARÁN LYNCH IN THE CHAIR.

AIB – Mr. Michael Buckley and Mr. Eugene Sheehy

Chairman

As we have a quorum, the Joint Committee of Inquiry into the Banking Crisis is now in public session. Is that agreed? Agreed.	13
Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off at today’s proceedings? We begin today’s session 1, public hearing and discussion, with Mr. Michael Buckley, former group chief executive, and Mr. Eugene Sheehy, former group chief executive, Allied Irish Banks. In doing so, I’d like to welcome everyone to the 21st public hearing of the Joint Committee of Inquiry into the Banking Crisis.	14
This morning we will hear from Mr. Michael Buckley, former group chief executive, and Mr. Eugene Sheehy, also a former group chief executive of Allied Irish Banks. Mr. Michael Buckley retired as group chief executive and as director of AIB Group in June 2005. He has been director of AIB since 1995. Mr. Buckley is also a former managing director of the AIB Poland division and of the AIB capital markets division.	15
Mr. Eugene Sheehy joined AIB in 1971 and spent almost 20 years in retail banking, including branch manager appointments in a number of Dublin branches. He was appointed general manager retail operations in 1999, managing director AIB Republic of Ireland in 2001, and chief executive officer of AIB’s USA division in 2002. He assumed responsibility as group chief executive with effect from 1 July 2005, a position he held until his retirement in 2009. Mr. Buckley, Mr. Sheehy, you are both welcome to today’s proceedings.	16
Moving on to the formalities of today’s business, I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings going on and ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. The utmost caution should be taken not to prejudice those proceedings.	17
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, those documents will be displayed on the screen to your left. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.	18
The witnesses have been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents, these are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry.	19
So if I could now, to begin proceedings, ask the clerk to administer the oath or affirmation to you.	20

The following witnesses were sworn in by the Clerk to the Committee:

Mr. Michael Buckley, former Group Chief Executive, AIB.

Mr. Eugene Sheehy, former Group Chief Executive, AIB.

Chairman

Okay, so I now invite Mr. Buckley, followed by Mr. Sheehy, to make their opening remarks to the committee. Mr. Buckley.

Mr. Michael Buckley

Thank you, Chairman. I very much hope I will be of assistance to the committee today in its important work.	24
I joined AIB as head of investment banking early in 1991. And subsequently, as I said, I served as managing director of AIB Capital Markets and then as managing director of the Poland division. In October 2000 I was appointed group chief executive designate and I formally took over as group CEO in June 2001. My successor was designated in March 2005 and I retired at the end of June 2005. From the date of my retirement onwards, I had no further involvement in the management and board of AIB group. As I was retiring ten years ago, I can honestly say that I had no premonition, let alone any evidence, that a liquidity and credit crisis was building internationally or that when that major crisis crystalised late in 2008, that AIB would be so vulnerable to it and ultimately would only survive through taxpayer support. I deeply regret what happened and the damage it inflicted on the lives of so many.	25
There are two interlocking parts, Chairman, to the account I want to give of my time as CEO of AIB. They are in my written witness statement. I’m just summarising them here. I’m going to start with the business strategy in general and as it applied to the Republic of Ireland in my time. And second of all, I want to talk about risk and credit management. First, the business strategy. In 2001 the business environment was fraught. It was in the wake of the dotcom crash, then 9/11 and we had the added challenge in Ireland of foot and mouth disease. As a result, the strong period of growth that started in the second half of the 1990s slowed for, I think, about two years, but from early to mid-2003 the economy returned to its catch-up growth spurt. There had been a 1 million person increase in the population between 1971 and 2001. The labour force had increased by 400,000, or 32%, in the ten years up to 2001. The number of people in employment had risen by about 400,000 also, or 49%, in the same ten-year period. Such a rate of demographic growth and change hadn’t been seen in the history of the State and the numbers continued to grow through the whole period of my time as CEO. That meant the potential for many new customers and strong demand from that growing customer base across the whole range of financial products in a very low interest rate environment. I think that context is very important.	26
In 2001, investors saw AIB as a federation of banking franchises with varying growth prospects but without any distinctive common thread to its brands. They saw our main market, the Republic of Ireland, as dynamic but their view was that other banks operating here had more exciting growth prospects. The strategy we set out in response to those factors, was to position ourselves to build one distinctive model of doing retailing and commercial banking that could be applied to each country in which we operated. And that model was to focus on growing the total value of each good customer relationship based on having best products, best service and best people. In our largest business here in Ireland we believed that we hadn’t been fully exploiting our greatest strengths, those were that we had between 30% and 40% market share of all personal current accounts and all business working accounts but a much lower market share of most individual product categories. So the strategy was to get better at responding to customer needs across the whole product spectrum.	27
I’ve mentioned the very strong demographics so building our relationships with good customers in the property and constructions sectors was a logical part of the strategy, but so too was building a stronger presence in the growing health insurance market and meeting the needs of our growing customer base in deposits, mortgages and investment products. When I presented that strategy to the board in 2001, I said that if we were successful in executing it we could have an aspiration of doubling our profits over the next five years. In some of the documents I’ve been given that aspirational outcome has been incorrectly represented as the strategy itself. In fact, the medium-term forecast and annual budgets presented to the board throughout my period are focused somewhat more modestly on achieving double digit earnings growth overall on a consistent basis. So doubling profits in a five-year period was never actually a budgeted target.	28
Property and construction lending grew strongly during my time, most of the material I have been sent about that looks at growth trends across the whole period of 2001 and 2009 in percentage terms. That in my view is misleading because the starting base was actually quite low. In money terms the entire group exposure to property and construction during my four years was about €6 billion in mid-2001 and it grew to about €19 billion, this is in euro, by mid-2005. And within those overall totals the figures for the Republic of Ireland were that it grew from €4 billion to €11 billion.	29
I have no evidence that at that level we had materially outrun the demand arising from deposit and demographics nor did I have a view coming to me from my credit professionals that standards were slipping at the time. On the contrary their view to me throughout and to the board was that credit quality was stable and strong.	30
In any business you’re trying to keep a fairly wide range of shifting factors in good balance so towards the end of 2004, as a result of the fact that loan growth had been significantly outpacing deposit growth, I began to focus on the increasing loan-to-deposit ratio and on the proposal from myself and my management team, the board put in place at that stage targets, one for the simple loan-to-deposit ratio and the second for an adjusted loan-to-deposit ratio. That was done to begin to slow down the rate of credit growth to a level closer to the growth rate for deposits and also to help ensure that internal capital generation was positive.	31
I’m going to turn now to my second main aim in the period mid-2001 to mid-2005; which was improving our risk management capability. That was partly for strategic reasons, it was partly also because we had three massive regulatory projects to implement; Basel II, Sarbanes-Oxley and the new IFRS accounting standards, and, thirdly, because I had to deal with two major crisis management events during my time – the fraud in our Allfirst subsidiary in 2002 and the FX charging issues identified in Ireland in 2004. Collectively, all of those factors required the single risk and finance support organisation to be built across AIB Group which had always been heavily divisionalised. That was a huge five-year project as I saw it. In the wake of the Allfirst fraud we commissioned separate independent reviews and reports on treasury operational risk, credit risk, policy frameworks across all of those things to get assurance that they were fit for purpose and we constructed a series of projects to implement the recommendations arising. The general message in those reports was that within each division there were no major issues but that we needed to establish common standards across the whole group.	32
During 2002-03 we recruited an experienced chief risk officer, reporting directly to me, to build that single organisation. We put in place a single group-wide treasury organisation. We again recruited externally an experienced head of internal audit to build a group-wide capability and we enlarged the mandate and scope of the compliance function across the group. We devoted massive resources both to the regulatory projects and to remediation programmes arising from Allfirst and from the FX charging issues in 2004.	33
Implementation was still going on when I retired, including a wide range of actions designed to change those aspects of culture and practice in the bank that were obstacles to colleagues at any level feeling free to raise any issues that concerned them. And that was a strong personal mission of mine. I have a couple of final things to say, Chairman. First of all, turning to credit policies, delegated authorities and exception management, Deloitte had carried out a very detailed policy and process review, I think towards the end of 2002 if my recollection is right. What they found was that there were “well established processes, policy and delegated authorities based on skill and experience, that grading and monitoring systems accommodated early identification and management of deterioration of credit policy, that there was a system of credit review independent of business reporting lines and written policies pertinent to current business.” That’s the end of the quote. Their recommendations mainly had to do with ensuring consistency across all of our divisions. The delegated authorities to divisional credit committees were relatively modest during my time. They were increased somewhat towards the end of 2004, but not dramatically, and exceptions to large exposure policy were infrequent. The month before I retired, in May 2005, Standard & Poor’s raised our long-term credit rating to A+. In their announcement, the agency said:	34
The rating on AIB reflects its leadership position in its main market, the Republic of Ireland, strong credit risk management, good underlying financial performance and sound liquidity. They also reflect AIB’s ongoing initiatives to improve its risk management procedures and control frameworks.	35
That is the end of the quote. Thank you Chairman.	36

Chairman

Thank you very much, Mr. Buckley. Mr. Sheehy.

Mr. Eugene Sheehy

Chairman, members of the committee, thank you for affording me the opportunity to outline my views on the banking crisis. At the outset, I want to say I’m very sorry for what happened and my role in these events. I know a lot of people were let down and feel very angry, deservedly so. I draw no comfort from the extraneous factors that contributed to the crisis. I take personal responsibility for my actions and omissions. Public apologies on many occasions have not diminished the deep disappointment that I feel on a daily basis. Chairman, in my written statement I have addressed the themes that the inquiry requested me to focus upon including property risk concentrations, liquidity, business planning, remuneration, regulatory relationships, delegated authorities and the bank guarantee. Conscious of time and that these themes will be covered during my evidence, and in light of evidence given to the committee last week, I will confine my verbal remarks to a summary of the evidence contained in my written statement concerning the bank guarantee. I have been asked to make a statement on the appropriateness of the guarantee. Though we did not make the decision, I will describe my role on the night and this role is described in detail in my contemporaneous notes, of which you have a copy.	38
Together with our counterparts from Bank of Ireland, we asked for a meeting with Government. At that meeting, we requested a four bank guarantee, but not the blanket guarantee that was ultimately provided. We were in Government Buildings for over six hours, our presence at the meeting was not continuous, and we were dismissed from the decision makers’ room on four occasions. At the first session we described what was happening in our business, and how our liquidity was being positioned. That day had been a tumultuous one on global financial markets. To stabilise the Irish banking market, we asked for a four bank guarantee. This was not a new idea. You will have copies of minutes of an AIB bank board meeting of the night before, in which I am quoted, “The authorities expect that two financial institutions will fail (unless white knights emerged) and would guarantee the obligations of the other institutions on a temporary basis”, recorded in the AIB minutes the day before the guarantee. We were dismissed from the room while our request for a guarantee was considered.	39
At the second session we attended, we were told that Anglo was about to default. The Government wanted us to give Anglo a loan to get them through the week so that they could be decisively dealt with by the weekend. We refused initially and were dismissed and were asked to reconsider our position. Working over the phone with colleagues back in Bankcentre we mobilised resources and looked into every possibility to come up with a response that would meet the Government’s needs. At the third session, we said we would give Anglo €5 billion until the weekend. On notice at this stage that Anglo was about to default, we refused to go on risk for Anglo. Our offer was conditional on a Government guarantee for this Anglo loan. This solution appeared to be acceptable to the Government and we said we would start moving assets to have the funds ready by Wednesday morning, and that in itself was quite a complex and intricate business.	40
The meeting reverted to the four bank guarantee and its form. We made suggestions regarding duration of the guarantee – we wanted a longer one than the one-year one proposed – and also on the merits of including bonds … of which we were in favour of. We were dismissed while a drafting process was undertaken and during this interval our input was sought on … in bilateral sessions regarding treatment of subsidiaries, for instance, our Polish business, and on what basis would be … what basis would be used to determine the price of the guarantee. When we were called back for the fourth session, there was a short discussion about a solvency statement being issued with the guarantee. We didn’t think it was necessary and after discussion, the Government decided not to include that reference. We returned to the room and at 3:30 a.m. we were told we were no longer needed. When we saw the guarantee document for the first time the following morning, we could not understand why Anglo and Irish Nationwide were included. All our discussions that night were based upon a premise that Anglo was to be taken down. We did not think they would be part of the guarantee, in fact, we were at that time, in response to a Government request, risking our own liquidity to keep Anglo afloat until the following weekend.	41
From our perspective, a four institution guarantee was appropriate and necessary for a number of reasons. Firstly, an Anglo default was absolutely certain to result in an immediate across-the-board agency downgrade for all Irish institutions and an immediate worldwide risk aversion for all Irish institutions. Secondly, in Great Britain where we had high street branches and €10 billion in retail deposits, we could expect an immediate run on our deposits. Thirdly, given the Irish public’s reaction to Northern Rock, a very minor player in this market, during their crisis in 2007, you could deduce from that it was certain that there would be panic on the streets and that our branches would not be able to cope.	42
In the absence of a statutory mechanism to deal with a failing bank, the options were to nationalise, liquidate or guarantee. There was no contingency plan nationally to deal with Anglo or at EU level to deal with the crisis in general. In the absence of alternatives, the default option was a four bank guarantee for the remaining four institutions, not the blanket guarantee ultimately given. This, I believe, offered the best chance to cope with the fallout about to be triggered by the imminent liquidation or nationalisation of Anglo and Irish Nationwide. The lessons from two weeks previously were fresh in everybody’s mind. Solutions that didn’t convince the markets invited misfortune. This was amply demonstrated when the US authorities allowed Lehman’s to fail. The decision did not restore market discipline and within days the US Government had to rescue many institutions – huge institutions – and introduce a €700 billion TARP, the troubled asset relief programme. These events contributed hugely to initiating the meltdown in global liquidity.	43
I wrote up my notes of the minutes … my minutes of the meeting a couple of days afterwards and absent hindsight observations that … I have made some in this statement … they are a contemporaneous record of events on the night as I saw them. Since I submitted my statement a month ago, I have been furnished with another record of events on the night from a Department of Finance source, which has been quoted at the committee. Comments are attributed to me that I cannot remember making. There was absolutely no evidence of any discussion of AIB’s solvency on the night, in either my note or that of Dermot Gleeson’s. We were asked for an update on what was happening in our banks which we gave. We were asked to provide funds to cover Anglo until the weekend which we agreed to provide. We were asked about the form of guarantee. We gave advice on duration and the instruments that could be included. We gave advice on duration and the instruments that could be included. We were asked for our views on Anglo and Irish Nationwide, we said they should be nationalised. This fact is recorded in both my note and that of Dermot Gleeson. This fact is further collaborated by the note from the Department and I quote “Minister asks FR, did they agree with AIB, Bank of Ireland, that two need to be nationalised first. FR did not agree.”	44
If I said the words attributed to me in the Department of Finance note, they could only have been in the context of what would have happened to the system if no remedial action was taken. There was absolutely no issue about AIB solvency at that time.	45
Chairman, in conclusion I spent 38 years in AIB, operated at many levels and I knew the organisation very well. I was proud of what the bank had achieved over the decades. I always viewed my job when I became CEO as one of stewardship, responsibility to staff, customers, shareholders and the public in general. It was my wish that in due course I would hand on the job to somebody else with the bank in good shape. That I failed in that responsibility, for me is a matter of eternal regret and sorrow.	46
Thank you, Chairman.	47

Chairman

Thank you very much, Mr. Sheehy, and thank you again, Mr. Buckley. I am sure other members will over the course of the morning return to some of the matters you raised about the guarantee, but as we are aware the guarantee was a response to a crisis, it wasn’t the instigating factor of the crisis and that’s what I would like to delve into now, if you don’t mind.	48
Mr. Buckley, in your opening statement, can you confirm to the committee, that is what you’re telling the committee, that you left AIB in a fundamentally sound position when you departed?	49

Mr. Michael Buckley

That is my belief, Chairman. Yes.

Chairman

Okay. Thank you very much. In that regard so, Mr. Sheehy, could you maybe explain to us as to what actually happened under your watch that led to AIB having to go in to a bailout programme and be guaranteed?

Mr. Eugene Sheehy

Yes, Chairman. I fully agree with my colleague that in the middle of ‘05 the outlook and the condition of the bank was very positive and that continued, in my view, for a number … a couple … of years after that. It was only when the market began to unravel, both internationally … one way I look at it is, there was an international context, there was a national context, and there was an institution specific context. And, all three of those dimensions changed for the worst in … from the middle of late 2007 onwards. There were reasons for it and I’ll only address the institution specific ones. Obviously, everybody is familiar with the context as you had in the Context Phase.

When the market turned negative we were … we found ourselves overexposed in property in the Republic of Ireland and specifically certain types of property in the Republic of Ireland. Our expectations as to how those assets would behave in a downturn didn’t pan out. The stress tests we relied upon, while there were one in 25 year stress tests weren’t equipped for a one in a hundred year stress, and as a consequence post-2009 as the market continued to display very severe write-downs, the bank’s capital position became compromised and it required support from the State. Earlier of course, it had got support in relation to the guarantee, so that would be my explanation of how it came to be.

Chairman

Alright and we’ll deal with that as the morning now goes on. Our first lead questioner is Deputy Kieran O’Donnell. Deputy, you have 25 minutes.

Deputy Kieran O’Donnell

Thanks very much, Chairman. Welcome to Mr. Buckley and Mr. Sheehy.	55
Mr. Buckley, can I just ask a question of your time? During your tenure, like a number of major control issues arose and you mentioned Rusnak, Faldor and the foreign exchange, the incorrect interest charges for offshore accounts. How would you reconcile that with the governance standards that you would have outlined each year in the annual reports?	56

Mr. Michael Buckley

I think, Deputy, we were … first of all we were very clear about any control failures that happened during that time. I mean … so that’s the first point I’ll make. When the Allfirst treasury fraud occurred over in Baltimore we immediately … within I would say 36 hours of first hearing that there was an issue, I was on the radio first thing in the morning sizing it, and very quickly then we said we would bring in independent investigators, which we did, of the highest quality, to investigate it thoroughly, and we promised at the very beginning that we would publish all of the findings of those investigations. So, first of all, I think that’s a very important governance statement because we were making a promise to shareholders and to customers and to our own people that nothing would be brushed under the carpet, and that is a path that we followed two years afterwards when the FX charges issue came up.

Deputy Kieran O’Donnell

How would you explain that these three scandals arose at the time they were reported as such, arose in a … over a two year period?

Mr. Michael Buckley

I think that to some extent that was a coincidence but it would be foolish of me to say that that was totally a coincidence. I think there were some very important common threads between them. The thing I would say is that a common thread between them is that, to take the FX charges and related things first of all, those issues, by and large, referred back to the 1980s up to the early 90s, and the subsequent investigations found that in most cases the particular issues that had been brought to the regulator’s attention and, via the regulator, to our attention, had been dealt with, by and large, during the course of the 1990s so there was a large element of history about them. To me, they were probably … the FX charges was probably the most upsetting part personally to me of my time as CEO because it said that there was stuff going on there that, in terms of the values and principles that I would have had, that were contrary to those principles. Now … but we did tear up the floorboards. I mean, I remember when the FX charges thing came up first, I was on television, and I said those very words. I said, ‘This information about that issue has gone to the regulator and what we are going to do is not only to investigate that as far as it goes but we will tear up the floorboards on every issue of charges that we know about and we’ll try to find anything that we don’t know about”, and we made a promise to customers that we would remediate every case of customer detriment, which we did. So that’s … I think that’s the governance part of—–

Deputy Kieran O’Donnell

On that point, like, the Rusnak came to prominence in ‘02, Faldor case in ‘03, the foreign exchange rate setting came in ‘04.

Mr. Michael Buckley

Yes.

Deputy Kieran O’Donnell

So I mean, I suppose to borrow an Oscar Wilde phrase, for one to happen would be unfortunate, two is careless. So clearly people were not taking account of the investigations that were going on in the other areas. So how do you finally account for that? And you might also explain to me as well in terms of property lending, that during your tenure, post ‘04, so ‘04 and ‘05, you had an increase in property lending of 6% in ‘03. You had 48% of an increase in ‘04, and you had 52% of an increase in ‘05, just before Mr. Sheehy took over.

Mr. Michael Buckley

Yes.

Deputy Kieran O’Donnell

And that’s significantly higher than your two main competitors at the time, Bank of Ireland, which was 24% and 23%, half of that amount virtually, and Anglo were at a figure of 35% and 38%. So you might explain how we have these sequence of events whereby you had these various defrauding of customers happening and, at the same time, ‘04 and ‘05, you had this rapid explosion in property lending under your watch, Mr. Buckley.

Mr. Michael Buckley

There … thank you Deputy. I think there are several questions there, if you don’t mind I’ll answer them separately, is that okay, Chairman? So first of all, if I take the Allfirst one, that wasn’t a case of defrauding customers; it was a case of defrauding the bank. There was no customer detriment involved there. Second of all, in the FX charges, and I include other things in that as well in that particular area, in the principal issue there that gave rise to that whole scandal, there was no customer detriment. What had happened was, we as a bank, were required to get written approval in the mid-90s, I think it was 1996 or something like that, for our foreign exchange charges. We had failed to do that. The investigation then found that actually our charges in the marketplace were no worse than any other bank, so therefore we were not disadvantaging customers. Despite that, we went and remediated and refunded every customer that we could find. The third element, Faldor, was a situation where there was no customer detriment. This was a question as to whether, how will I say, a particular legal entity – an investment vehicle – had been given preferential treatment by our investment management arm. It wasn’t anything about customer detriment.

Deputy Kieran O’Donnell

Could you move on to the loans then?

Mr. Michael Buckley

Yes, absolutely. Yes, there were very big increases in that year and a half period or so before I finally retired and I would say there were two reasons for that. One, as I said in my opening statement, the economy was beginning to recover from a pretty tough few years after the dotcom, and we got … there was a sort of catch-up spurt I think.

Deputy Kieran O’Donnell

You were significantly ahead of your competitors.

Mr. Michael Buckley

Yes, but we had always been a bank that lent to property and construction. I mean, if you go back to 1998—–

Deputy Kieran O’Donnell

Was it endemic in the culture of AIB?

Mr. Michael Buckley

But, if I may say so, there is nothing wrong with lending for property and construction development. I mean, in 1998 our loan book for property and construction, depending on whether you count in or out our US subsidiary, was somewhere between 12% and 15% of our total book. So we had a long history in lending and we were quite comfortable that we were an experienced lender to property and construction.

Deputy Kieran O’Donnell

Can I just move on to Mr. Sheehy? Just on the whole issue, I am taking the property side. You would have very much breached the prudential lending limits in July ‘06. How do you reconcile that, because you were effectively, by the end of 2006 you were breaching these limits significantly and by 2008 you were way ahead. You were … effectively, you could have about 250% of own funds in two related sections. You were at 390%. How do you reconcile that Mr. Sheehy?

Mr. Eugene Sheehy

Deputy, in 1995 the regulator changed the guidelines for concentration limits to 200% for one asset class and 250% for related assets.

Chairman

I will just make a short intervention. When you are responding to this, there is some documentation that actually relates to that. I will reference it as you are making the response so it can just go up on the screen. Okay.

Mr. Eugene Sheehy

Yes, okay. Fine.

Deputy Kieran O’Donnell

It is B2, Vol. 1, page 6.

Mr. Eugene Sheehy

Yes, I’m—–

Deputy Kieran O’Donnell

You are familiar with it.

Mr. Eugene Sheehy

Yes. So yes, there were guidelines and they were breached and advised to the board, and discussed at the board and discussed at management generally. What was happening … if that happened in total isolation of what was happening overall in terms of regulation, I would say the bank was ignoring a guideline, but that wasn’t the case. We weren’t ignoring the guideline. We were talking to the regulator about the guideline and the regulator was talking to us about the emerging solution to risk concentrations which—–

Deputy Kieran O’Donnell

Taking that context, Mr. Sheehy, at the end of 2008, you were far in excess. You were breaching the guidelines on one sector, we’ll say, which should have been 200%, you were at 275%. The two sectors should have been at 250% and you were at 390%. Was the regulator in agreement with this, satisfied with this?

Mr. Eugene Sheehy

Well, you are picking two different points in time now. The ‘06 reference was … okay, we were up against and going over, and the way these things were being measured was going to be changed under Basel II. The ‘08 data point is at the end of a period where the market has stopped functioning correctly, so you weren’t getting—–

Deputy Kieran O’Donnell

You were getting to the top of the hill?

Mr. Eugene Sheehy

Well, you have no cash flow coming in at that stage so your ratios were going to go up.

Deputy Kieran O’Donnell

No, I’m asking how did the regulator view that?

Mr. Eugene Sheehy

Well, we were in discussion with the regulator about it – there’s evidence of that in the bank documents – and we were working jointly at the time on the Basel II model and how that would look at sector concentrations, so that was a big issue because it was a totally different way to look at risk concentrations where in—–

Deputy Kieran O’Donnell

There are two questions, Mr. Sheehy.

Mr. Eugene Sheehy

Yes.

Deputy Kieran O’Donnell

No. 1—–

Chairman

Give the witness time to respond when he—–

Deputy Kieran O’Donnell

—–why you breached it—–

Mr. Eugene Sheehy

Yes.

Deputy Kieran O’Donnell

—–and, No. 2, what view did the regulator take?

Chairman

Allow Mr. Sheehy to respond.

Mr. Eugene Sheehy

Okay. We breached it and it was … as soon as it was identified, you know, it was reported and discussed with the regulator, so, if you like, it was a breach in open sight, it wasn’t something that was hidden. The regulator acknowledged the breach, didn’t remove the limit, you know, but at the same time acknowledged that we were working on the Basel II process, which was going to look at it in a different way.

If I could just briefly explain, Basel II, the approach to credit concentration in Basel II is totally different. It is not by looking at a definition of an asset class, it looks at all individual credits and applies different stresses and measures to them and attaches a risk weighting to them which leads to a calculation, so it was really as different as chalk and cheese, the way this system was moving towards it. In the meantime, we were in breach and we were talking to the regulator.

Deputy Kieran O’Donnell

Should you have breached the limits?

Mr. Eugene Sheehy

In hindsight, no, we shouldn’t have breached the limits.

Deputy Kieran O’Donnell

And can you explain, Mr. Sheehy, why, under your tenure, between ‘05 on, your development loans, property and construction loans, you had a 52% rise in ‘05; ‘06, 41%; ‘07, 32%; way in excess of your competitors in Bank of Ireland, which were 23%, 23% and 22%, virtually … significantly less. And, looking at it, that even with Anglo in 2005, you had 52% of an increase and you had … Anglo had 38%. So, can you explain how you … Mr. Buckley says you had … you were a bank that lent to property, but how did you foster this culture where you had this rapid escalation in property and construction lending?

Chairman

Mr. Sheehy.

Mr. Eugene Sheehy

I note the comparators you’re making and I’m only going to talk about a comparison between ourselves and Bank of Ireland because that’s the only equivalence. They were a retail commercial bank; so are we. There was a slight difference in our customer base. We were much heavier than they were in the SME sector and property and construction was widespread. We had, you know, in the … we had very large customers and then we had 650 customers who had property and construction loans of over €1 million, so it wasn’t … it was very broadly spread and reflected our franchise and the nature of our franchise.

100

Deputy Kieran O’Donnell

Well, except, Mr. Sheehy, it made you—–

101

Chairman

Sorry, I need to let Mr. Sheehy time to respond.

102

Mr. Eugene Sheehy

I’m just following up on something my colleague, Donal Forde, said the other day. We kept pace with our customers. We didn’t grow market share in that case. Point-to-point, you will get different percentages moving around. Some of the examples you gave are different end financial years.

103

Deputy Kieran O’Donnell

Correct, I accept that, but generally.

104

Mr. Eugene Sheehy

But generally, we had a customer base that was business-focused and heavier in business than, say, Bank of Ireland. Our customers wanted to be in the property and construction business. We had a good track record with these customers and we followed them.

105

Deputy Kieran O’Donnell

And how do you view that in the context that you were so exposed to property that it has meant that €20 billion of taxpayers’ money has ended up going into AIB? And you’re on record as saying that you’d rather die than take equity.

106

Mr. Eugene Sheehy

Yes, I can address that particular statement if you want. That was in October 2008, in a public meeting, and an individual asked me, you know, “Are you about to have a rights issue?” Now, it’s very simple rules in corporate governance about what you do if you’re a public company. There’s also lots of documents you will have seen that we were adequately capitalised at the time. If a board had decided to raise funds in a share placement with customers, you would have to immediately announce that. At the time we were looking at capital, and we had a whole range of mitigants that we thought we could apply. We were a long, long way from ever having to, at that stage, ask shareholders to pay up. At the time there was an active shorting in the market, and a huge amount of speculation on bank shares in Ireland that were being played out of London and New York. I had to be very definite and honest in my response. Sorry, I lost the first part?

107

Deputy Kieran O’Donnell

Twenty billion euro of taxpayers’ money gone into AIB.

108

Mr. Eugene Sheehy

Yes.

109

Deputy Kieran O’Donnell

As a result of this jumping, we’ll say, into property and at such a rapid rate.

110

Mr. Eugene Sheehy

That’s—–

111

Chairman

The question is: there was a rate of growth in AIB; was that worrying? And did that result in a €20 billion requirement of the Irish State to actually assist AIB as a consequence of that rapid growth and the management related to it?

112

Mr. Eugene Sheehy

There is absolutely no doubt the two things are absolutely binary connected. They were connected. There is no doubt.

113

Deputy Kieran O’Donnell

Can I just move on to the guarantee? And you made reference to your quote that the … it’s on AIB C3b, Vol. 2, page 29, which is the minutes of the Department of Finance. And you said: “People we’ve been dealing with for decades pulling back. One month we would be funding bank overnight. Bad if it can’t even get that disaster bankruptcy.” Are you disowning that statement?

114

Mr. Eugene Sheehy

I said I can’t remember it.

115

Deputy Kieran O’Donnell

Had ye a liquidity problem? Did AIB—–

116

Mr. Eugene Sheehy

Oh absolutely, everybody had a—–

117

Chairman

I just asked Mr Sheehy to deal with the statement first and then we’ll move on to the next question.

118

Mr. Eugene Sheehy

So I said it in my opening statement, I can’t remember saying that, and I said that, you know, that kind of language could have been used in relation to the systemic issue of, if the system, the entire banking system, as a result of the imminent Anglo default, was allowed to continue, liquidity would have kept on shortening and shortening and shortening. And if that happened, banks that are solvent, bank that have more assets than, you know, surplus assets, can go out of business because they just can’t get cash.

119

Deputy Kieran O’Donnell

And are you saying AIB did not have a solvency problem on the night of the guarantee?

120

Mr. Eugene Sheehy

Yes, absolutely, did not have.

121

Deputy Kieran O’Donnell

And on the night of the guarantee did AIB go in with a guarantee, I suppose, an outline, a draft of a guarantee?

122

Mr. Eugene Sheehy

I’ve racked my brain on this, Deputy, and I can’t actually remember whether there was a piece of paper or not. If there was, it must have been a very small piece of paper or it must be in the Department’s records. I can’t remember it.

123

Deputy Kieran O’Donnell

What was the outline of that? What was the outline of your guarantee you were looking for?

124

Mr. Eugene Sheehy

The outline of the guarantee, and I don’t recall whether it was a written one or not, would be: stabilise the situation immediately. The 20 … that day globally was unbelievable and it was clear that worse things were to come internationally. So stabilise the situation. However—–

125

Deputy Kieran O’Donnell

The specific form of a guarantee you were looking for?

126

Mr. Eugene Sheehy

Well remember we have a guarantee eight days before already, a €100,000 guarantee, €200,000 for a kind of a household limit. So it wasn’t … this was to some degree an iteration of a series of steps that the State was trying to take to stabilise the situation. What we didn’t know on the day when we went in was that there was an institution-specific problem which would have exacerbated and multiplied to a huge degree all the other problems we thought we had when we went into the meeting.

127

Deputy Kieran O’Donnell

And if you were looking for both Anglo and Irish Nationwide to be nationalised?

128

Mr. Eugene Sheehy

We were asked for our advice on that, and that’s what we said.

129

Deputy Kieran O’Donnell

Did ye have further discussions, communications with Government or officials in the Financial Regulator after the guarantee was put in place on the night of the guarantee?

130

Mr. Eugene Sheehy

There were discussions in the days that followed, but frankly it … the entire focus in the days after the guarantee were coping with what was happening globally in London and seeing how the guarantee bedded in. Our big issue actually in the days that followed the guarantee was that pricing for deposits priced up to the sovereign and there was no distinction between strong or weak institutions.

131

Deputy Kieran O’Donnell

Can I ask you … yes, can I ask you in the context of AIB C3b, Vol. 2, page 45, Project Omega, what was Project Omega?

132

Mr. Eugene Sheehy

Project Omega, I think it was in November, we were asked by the Minister for Finance—–

133

Deputy Kieran O’Donnell

Finance.

134

Mr. Eugene Sheehy

—–to seriously consider taking over Anglo.

135

Deputy Kieran O’Donnell

Okay.

136

Mr. Eugene Sheehy

If the Minister asks you, you do look at something so we engaged in the normal corporate finance mark-up process for 60 or 70 pages of it. A fair bit of it was boilerplate stuff actually. It’s not … it wouldn’t be a very heavy document. It was discussed at my forum the group executive and dismissed and resolved that it would not be pursue. And our conclusion was then reported to the board. It was not discussed by the board.

137

Deputy Kieran O’Donnell

Not discussed by the board. Why not?

138

Mr. Eugene Sheehy

Well, we told them that we weren’t going to do it.

139

Deputy Kieran O’Donnell

Okay. And did the board accept that?

140

Mr. Eugene Sheehy

Yes.

141

Deputy Kieran O’Donnell

So it was it was made known to the board.

142

Mr. Eugene Sheehy

Yes.

143

Deputy Kieran O’Donnell

Specifically. And in that … this is a presentation to the board … did you make this presentation, Mr. Sheehy?

144

Mr. Eugene Sheehy

The presentation was not made to the board. That was given … it might have been in the board papers.

145

Deputy Kieran O’Donnell

But it wasn’t…

146

Mr. Eugene Sheehy

We said to the board: ‘’Got the request, looked at it, not a runner. Pass on”.

147

Deputy Kieran O’Donnell

And can I ask you, put in there, it said: ‘’In addition any transaction should only be undertaken following full due … and would require significant Government support. Were the Government … the Minister for Finance was he … had he made put forward to you that they would be willing to provide support if AIB took over Anglo?

148

Mr. Eugene Sheehy

There was no detailed discussions about it. We were just asked to have a look at it. There wasn’t any negotiations or terms or …

149

Deputy Kieran O’Donnell

And did you go back to the Minister to say that would not happen, that ye were not…?

150

Mr. Eugene Sheehy

I can’t recall how we went back but we … I may have communicated to the Department that, you know, it wasn’t going ahead.

151

Deputy Kieran O’Donnell

The final thing I want to check is on remuneration. And, Mr. Sheehy, your salary peaked in 2006 at €2.4 million per annum.

152

Mr. Eugene Sheehy

Total compensation.

153

Deputy Kieran O’Donnell

Total compensation, but €1.3 million of that was a bonus, right. The question I want to ask is: how could you justify such a salary? And it would appear that the remuneration scheme for higher executives was brought in under your watch, Mr. Buckley, so that you had a situation up to ‘04 where the bonuses weren’t crazy relative to salary up to ‘04, but from ‘04, ‘05 on—–

154

Chairman

Maybe … don’t apply a judgment—–

155

Deputy Kieran O’Donnell

Can I ask—–

156

Chairman

Sorry Deputy, don’t apply a value judgment to the figure. Mr. Sheehy’s job is to explain the judgment of the figure.

157

Deputy Kieran O’Donnell

Mr. Sheehy, can you explain how you ended up on a salary of €2.4 million per annum and how can you justify that? And was your remuneration policy … did it build in any element of risk in terms of a judgment of property transactions?

158

Mr. Eugene Sheehy

The numbers are very high, not justifiable in my view in today’s terms and—-

159

Deputy Kieran O’Donnell

If I—–

160

Chairman

Deputy, if you ask a question, you have to allow the witness time to respond.

161

Deputy Kieran O’Donnell

Well you’ll appreciate time is limited.

162

Chairman

I do and that’s why I’d ask you to keep your questions short.

163

Mr. Eugene Sheehy

I would say they were not justifiable, period, okay, no matter what time you’re looking at it. How were they constructed? There’s a number of components, as you know. There’s a salary, a bonus and there’s a long-term incentive and there’s … I believe we had a robust policy around it. Large elements of the policy never worked, you know, the long-term incentives never worked because the goal … the targets were too high. I had a personal policy of reinvesting all my bonuses in AIB stock. But, look, there’s no way you could tell anybody in the street that these were acceptable levels of pay. That’s a fact.

164

Deputy Kieran O’Donnell

And the can you justify a salary of €1 million a year, a basic salary at that level in ‘06-’07?

165

Mr. Eugene Sheehy

I didn’t have it. You’ll see that …

166

Deputy Kieran O’Donnell

You had a basic salary—–

167

Mr. Eugene Sheehy

I had a basic salary. I think it peaked at I think €900 and something—–

168

Deputy Kieran O’Donnell

Correct, you were just short of €1 million.

169

Mr. Eugene Sheehy

Yes, but it wasn’t €1 million and—–

170

Deputy Kieran O’Donnell

Well I think it’s splitting hairs, Mr. Sheehy.

171

Chairman

Deputy please, please … Sorry, Mr. Sheehy and Deputy, please questions to the Chair and responses to the Chair.	172
Please allow the witness to answer without a value judgment being applied. Indeed the committee in its final report will apply its own value judgments. Mr. Sheehy.	173

Mr. Eugene Sheehy

Thank you. Just in general on remuneration. You know, there was a number of components to it and they were scientifically constructed. We had three external consultants who looked at it. And their methodology was to bring you into a peer group and a reference group and that was probably the biggest driver of the pay policy. I never asked and I don’t know of any colleagues who ever asked the remuneration committee for a pay increase. It was kind of mechanically devolved out of a system of peer references. And if you look at the Nyberg report you will see that AIB was much, much lower … rather than … of the peer group, in terms of size. So, there was a science to it. There wasn’t executives going up, banging the door saying “I want more pay”. It never happened. But the actual amounts that we were paid were too high … I mean, when I came from the States I was paid a lot less over there, but they had a totally different philosophy about long-term compensation, so you could make a lot of money in the States as a bank executive if you stayed in an institution for a long time, because there was a huge upside in stock. Here there was … actually it turned out, no upside in long-term compensation because the bar had to be … was … CPI plus 10% compound which is virtually impossible … actually impossible to make, so they never vested it. I think once in ten years there might have been a small vesting. So there was flaws in the design, too much influence by peer reference, but there was no clamour among bank executives, the people who reported to me directly, for more pay.

174

Chairman

Thank you. I just want to clarify with you a couple of matters … just finishing off that point. Very simply, Mr. Sheehy, looking back at what was the financial standing of the bank during that period, was the level of your remuneration, bonus and reward merited?

175

Mr. Eugene Sheehy

In hindsight, no. At the time you could have made a case for it and you know … third parties, professional third parties would have made a case for it.

176

Chairman

I just want to clarify one thing with you, just to assist the committee and it is going back to that note of 30 September that Deputy O’Donnell related to – it is coming up on the screen in front of you. To your view, is that an accurate account of the evening’s records? You are familiar with that document?

177

Mr. Eugene Sheehy

I am, and it is not … in some respects … you know, I think Mr. Gleeson referred to a mix up of points he made with … under Mr. Burrows’s heading. But I have no doubt it’s a best effort and I wouldn’t criticise it … you know it might be a bit mixed up but—–

178

Chairman

I can only account, in fairness to yourself, Mr. Sheehy, the parts of those notes and those records, that it should be to yourself. I know there are records there in regards to Mr. Burrows, Mr. Hurley and others, but there are a number of points that refer to you. Do you consider that to be an accurate account?

179

Mr. Eugene Sheehy

As I have said, I don’t recall using the word “bankruptcy”. And if there is an inference being taken from that statement, that there was something to do with AIB solvency, I would absolutely reject that that ever arose.

180

Senator Sean D. Barrett

Go raibh maith agat, a Chathaoirligh, and welcome to our visitors from AIB. What was proposed on the night of the guarantee was a four-bank guarantee. Was that for deposits only and how much would that guarantee have cost?

181

Mr. Eugene Sheehy

Our proposal was for a four-bank guarantee. Clearly when you are discussing nationalisation, liquidation or default of an institution, that’s not part … that institution isn’t part of the future, that’s part of the past that has to be dealt with. We argued, I certainly argued, that the bonds should be included and the reason for that was if you looked at the mistakes that were made in the US around Lehman’s and the inconsistency from day to day of the regulatory response, not only in the US but in Europe and in the UK – where we knew … we found out subsequently there was secret loans being given to banks – you had to be clear about the message you were giving to the market. Clarity is very important. If some of those instruments weren’t covered, our investor relations desk would have 100 calls within one minute about “Define exactly what you mean here”. So the definition and the clarity were important.	182
It is worth pointing out that on the night, AIB had no bonds or subordinated debt instruments that would in any way have been enhanced by the guarantee. None. We had perpetual debt, which is irrelevant for a timed guarantee and we had dated debt, the earliest of which fell due in 2013. So there was no agenda from our point of view of getting something extra.	183
The pricing of the guarantee on the evening wasn’t discussed. Now, we did have a reference, if you looked at the €100,000 guarantee for individuals which was introduced on 20 September, and that had a 20 basis point price on it. In the bilateral discussions that we had around pricing of the guarantee I was pushing for an FDIC model which is the US model about … you price the guarantee relative to the risk you are taking, and the risk you are taking is based on a formula, called a CAMEL formula, which takes in capital, liquidity, management risk. It would take a bit of working to do but there was a model for pricing of guarantees that’s the biggest model in the world, used by the FDIC in the US.	184

Senator Sean D. Barrett

So you had two organisations left out. Were there any other differences between what the Government actually did and what you were proposing, apart from leaving out two banks?

185

Mr. Eugene Sheehy

We didn’t propose anything. We gave advice on … in response to questions we were asked. We said we needed a guarantee, the system needed a guarantee of some type, because of what had happened that day and what was absolutely certain would happen over the coming days. And after that then for instance, when it came to the duration, there was a one-year duration proposed. The way the markets operate one year is actually a product, you know, 90 days is a product, there are buckets of time-based funding instruments and one year is one year for one day. It just becomes technically very difficult to do anything with a one-year guarantee, so we recommended a two-year guarantee and subsequently the European Commission came out and said that that was the only type of instrument that would have had a chance of working, less duration would not have worked.

186

Senator Sean D. Barrett

But we don’t know the difference between the cost of what you were proposing and what the costs turned out to be for the Government’s proposals, is that right?

187

Mr. Eugene Sheehy

The cost of the guarantee … I don’t know what … I don’t think it costs the State anything. The issue for the cost for the State arose when the assets of the banks fell short. I mean, the guarantee … there was several billion in fees paid for the guarantee and it was eventually retired.

188

Senator Sean D. Barrett

The regulator proposals of the McDowell report earlier in that decade … did the banks support those or oppose them?

189

Mr. Eugene Sheehy

The McDowell report … you’ll have to refresh me on the McDowell report, it wasn’t in my documents.

190

Senator Sean D. Barrett

It was a proposal for a separate regulator and it was opposed by the Department of Finance and the Central Bank. There was quite a controversy at the time, probably under Mr. Buckley’s term I suppose.

191

Chairman

Are you familiar with the document that Mr. McDowell, the former Attorney General, was bringing forward at the time? If you are not, I will just move on to another question.

192

Mr. Eugene Sheehy

I wouldn’t know the detail of it but if the question is about, you know, was the regulatory structure appropriate which … I mean we had dealings, and I had dealings, with the FR from the time. I had some dealings with them before I left to go to the US, I had a lot of dealings with them when I came back. At the time, certainly from mid-2005 on, the focus was on consumer-related issues, as a knock-on I think from the issues that Deputy O’Donnell raised – you know, the governance issues. So there was a big focus on that, and then it was immediately kind of replaced by the three big programmes: SOX, Basel and IFRS, which totally consumed the regulator’s energy and our energy, certainly through 2006 and most of 2007. So it was a … I think the regulator at that time was taxed with a huge amount of oversight in what was happening in the market.

193

Chairman

He was described as “hopeless” in a document which was sent to you. Was that a widely held view in AIB?

194

Mr. Eugene Sheehy

It wasn’t my view.

195

Chairman

Dermot Gleeson … I just need you to attribute that, Senator … Dermot … Mr. Gleeson’s commentary of last week.

196

Senator Sean D. Barrett

Yes.

197

Mr. Eugene Sheehy

It wasn’t my view. As I say, I had a lot … I had a lot of contact with the regulator and his team. I found them to be tough enough people to deal with. When all the regulatory stuff came down on the SOX, Basel, and IFRS, I know that, where I could call on battalions and experts to come in and help me out, I thought they were dreadfully under-resourced … is my view, during … in trying to cope with that weight of change … technical change. I recall Mr. Gleeson’s statement and I’ve spoken to him about it and he regrets saying it. He says it was in a fit of pique in those hours and days after the guarantee. But I found the regulator and his team to be diligent, hardworking public servants who always acted with integrity.

198

Senator Sean D. Barrett

The question of property was raised by Jim O’Leary, an economist from NUI Maynooth, at the board meeting on 13 January 2004 … at your board. What resulted from that query by Mr. O’Leary?

199

Chairman

Who’s this question to, Senator?

200

Senator Sean D. Barrett

2004.

201

Chairman

No, who are you making the question to? Mr. Buckley or Mr. Sheehy?

202

Senator Sean D. Barrett

Mr. Buckley, I think, was in charge at that time.

203

Mr. Michael Buckley

I think that’s me.

204

Chairman

And the reference on that question there, if you have it?

205

Senator Sean D. Barrett

B1, page 74.

206

Chairman

Thank you.

207

Mr. Michael Buckley

I believe I remember, Senator, what you’re talking about. Yes, I think what happened, Senator, was that Jim O’Leary, at a board meeting in, as I recall it, sort of May-June sort of time in 2004, asked for a presentation about property and construction lending from a strategy, credit quality, etc., point of view, and a detailed presentation was made to the board in October of that year, which covered all of the … which covered all of those issues, the business strategy, where we had got to, volume growth, and credit quality. And I recall that the presentation was made by, I think, three people. One was the executive responsible for that sector, for lending to that sector from a business development point of view, another was the head of credit in the Republic of Ireland division and the third person was a senior executive from the group credit committee. And, after a wide-ranging review of our activity, our strategy, etc., the credit officers there were asked were they happy with credit quality, did they believe that the risk mitigants that were present in the portfolio were appropriate, relative to the size of the portfolio, and they answered “Yes” to all of those questions. So, in other words, they said that at that point in time, which was, as I recall, October 2004, that the quality … the credit quality of that book was sound as far as they were concerned. And, I think … sorry, my recollection is that after the usual questions and challenges that the board expressed itself as being happy with what they had been told.

208

Senator Sean D. Barrett

Because in the group internal audit report in March 2006, which is B4, page 6, Chairman—–

209

Chairman

Of?

210

Senator Sean D. Barrett

Of Vol. 1. What that states … the audit … 2.5 years, virtually, later than when Jim O’Leary made his comment in January 2004, the audit in 2006:	211
The audit did not include an assessment of property related credit quality. In addition we did not raise an issue around the management of concentration risk at a Group level as this was raised in a previous audit of the Credit Framework in 2005.	212
Given that we now know this is what brought the bank down, wasn’t it a remarkably complacent response to the concerns of Jim O’Leary?	213

Mr. Eugene Sheehy

Chairman, will I take that? It’s a 2006 reference.

214

Chairman

Yes, please. Yes.

215

Mr. Eugene Sheehy

Senator, if you … it’s important that I just describe how internal audit works. We agree … I agree with them, and the chairman of the audit committee agrees, every year on a work programme, you know, what are we going to … what do we need to look at this year? So the work programme … so we would have asked them to follow this work programme to check out and validate that processes within each function were being carried out. And after that they rate the problems and typically they do find issues and problems there and you can see there’s a rating chart – material, significant, important, and minor. If you look at this report, there wasn’t any material problems identified and these factors are worked out as a money function – how much could it cost if it went wrong? But the observations, you know, I think are fair. We are … we always needed to be given a view from fresh eyes in a process – what was going on there and what do we need to concentrate on? So we would always take these results from the audit as a call to action.

216

Senator Sean D. Barrett

Thank you. Because on B2, Vol. 1, page 19, in May 2007, Dr. Alan Ahearne was making the same concerns to the board … that property prices were 30% overvalued.

217

Mr. Eugene Sheehy

Yes, we had a seminar where Dr. Ahearne and John FitzGerald attended and there was a general discussion about that. And, that would have informed our own internal stress-testing model which applied a 30% reduction to residential property as part of our one-in-25 year stress test. So we didn’t ignore or dismiss his observations and we took the high end. I mean, Dr. FitzGerald had a lower estimate, but we took the 30% fall, which, of course, would have been unprecedented in experience terms but that was applied in our stress test for residential property. So it was … his observation was taken on board and applied in the stress test.

218

Senator Sean D. Barrett

But the eventual discount from the properties transferred by you to NAMA was 56%.

219

Mr. Eugene Sheehy

Yes. Of course the … not all the property was transferred to NAMA so … but even still I count … dismissing that mathematical effect on the percentage, we all know that the decline in property prices was far higher than anybody expected, worse than the one-in-25 year expectation.

220

Senator Sean D. Barrett

Mr. Forde told us that the threshold submission to the group credit committee for loan approval was raised from €40 million in 2005 to €75 million in 2006. That’s an 88% increase. Did that indicate that this … we were getting out of touch with … a property bubble … to raise the threshold by 88%?

221

Mr. Eugene Sheehy

The thresholds and the levels of sanction are driven by a number of factors. There’s the absolute amount, which you have quoted. There’s the sensitivity of the amount to the grade of the sanction, and you will see in the matrix that the poorer grades weren’t increased. So you don’t increase the lending sanction for the poorer grades; you do for the better grades. And there’s also the link between the sanction amounts and own funds. You know, how much can you put on risk of your own funds? There was no increase in the amount of risk you could put on own funds because own … I’m talking about equity, because that had increased in the same period, so that was capped at 2.1% of own funds. The worst performing grades were not increased. So it wasn’t a … the numbers look significant but it was a fairly logical thing to do at the time.

222

Senator Sean D. Barrett

Could I draw attention, Chairman, to B1, Vol. 1, page 62? There’s increase in exposure to a company from €789 million to €991 million where the large … the group large exposure policy limit was €150 million. So the increase alone at one board meeting was greater than the limit and the eventual … the new limit was six times what the original one was. Again, did that not illustrate a lending policy which was becoming reckless?

223

Mr. Eugene Sheehy

I absolutely reject reference to the word “reckless”. If you look at that reference there to, on page 62 … that discussion was supported by a 64 page submission on that credit. It was quite detailed. It’s a very large number, but there were very large deals going on at the time. It was participation in a syndicated loan actually. The methodology used there was that when loans went over certain limits, they went to the next level of authority. And they carried with them the approvals and arguments that the various levels prior to that had made. In this case, when we looked at it and it went to board, there was a lot of support. The individual had enormously, much higher net worth, there was professional evaluations, there was in overall, I think, a loan-to-value of around 50% in the entire exposure. So there was … logically it made sense at the time.

224

Senator Sean D. Barrett

Yes. The name is redacted. Do we know if this one went to NAMA?

225

Mr. Eugene Sheehy

Yes. And I’ll just … could I make one reference from the comptroller and auditor’s report on NAMA in 2014? And he says:	226
There is an apparent inverse relationship between the level of debt and the relative impairment charges for individual debtors at the end of 2012. The rate of impairment for those debtors who owed over €1 billion or more where their loans were acquired was just over 4%. While those whose debts were less than €75 million at acquisition, the impairment was around 21%.	227
I couldn’t have anticipated that at the time and neither did NAMA at the time, but sometimes the bigger relationships because of the diversification that they had, you know … typically they would all have had significant UK exposure—–	228

Chairman

Five minutes now, Senator.

229

Mr. Eugene Sheehy

They … size didn’t mean worse, I suppose is … that’s my point.

230

Senator Sean D. Barrett

The decision to pay the dividend of €270 million on 26 September 2008 … that seems incredible in retrospect.

231

Mr. Eugene Sheehy

It would … it—–

232

Chairman

Sorry, that’s a leading question, just ask for some … we all know how much was paid. And I’m sure Mr. Sheehy has a view on it now.

233

Mr. Eugene Sheehy

First of all, the decision to pay the increased internal dividend was not taken on 26 September 2008. The dividend was paid on 26 September 2008. The decision to pay the dividend was taken in July 2008, for the half year ended June 2008. This is two months prior to Lehman’s and the general collapse of the markets. In addition, the question implies that the dividend was … extra dividend was €270 million. The dividend … the interim dividend is always smaller than the final dividend. Generally it is a kind of two thirds, one third split. Our interim dividend for the previous half year, June 2006 was 27.2 cent per share. We have 878 million shares, that was increased by 2.8 cent per share, a total cost of €24.58 million. So the €270 million that was paid on 29 September, approved in July, was made up of €270 million, of which €24 million was the increase.	234
Why did we make that decision? First of all, if the decision was being made in September, no dividend would have been paid. In the post-Lehman’s world, no dividend would have been paid. All bets were off at that stage. So when we declared a dividend, communicated it to market … that notice is filed on the Stock Exchange. It is now a mandatory, contractual obligation to pay the dividend, so you have no leeway to change your mind after you declare it. It is contracted. Shares are bought on the market, either ex or cum dividend from the date you make the declaration.	235
We wouldn’t have paid the dividend in September, if that was when we were making the decision so that’s my answer there.	236

Senator Sean D. Barrett

Could I just return, finally, Chairman, to B5 on page 5? It’s a question on which Deputy O’Donnell has raised but these references are a year later and a year closer to the crisis. The payment to the four executive directors was €6.4 million, of which yours was €2.1 million. Was there still no evidence that this was a banking model which was going to cost the taxpayers a lot of money very quickly?

237

Mr. Eugene Sheehy

This is ‘05? We are talking about ‘05?

238

Senator Sean D. Barrett

This is ‘07. The document is B5 and the page number is five. And the payments … the total are Mr. Doherty, €1.663 million; Mr. Forde, €1.394 million; Mr. O’Donnell, €1.273 million; and Mr. Sheehy, €2.105 million. And the total, €6.435 million.

239

Mr. Eugene Sheehy

Well, at that stage there wasn’t any evidence of what was going to come.

240

Senator Sean D. Barrett

Thank you very much. Thank you, Chairman.

241

Chairman

Okay, was there much discussion on this matter, Mr. Sheehy? Did it … was it decided over one board meeting or a series of meetings?

242

Mr. Eugene Sheehy

The pay issue—–

243

Chairman

Yes.

244

Mr. Eugene Sheehy

—–is decided by a separate committee of the board who are advised generally in the absence of the CEO. The CEO would come in when, obviously not when you’re there … not when your own pay is being decided. And the way it worked was, there would be a review of the financials, a review of general governance and behaviour you know did you meet all those criteria . And then a presentation by … at the time we used a firm called Kepler.

245

Chairman

A presentation to the senior board or at that board?

246

Mr. Eugene Sheehy

No, to the remuneration committee—–

247

Chairman

The remuneration committee, okay.

248

Mr. Eugene Sheehy

—–who then minuted those events and those minutes were passed to the main board. And the chairman of the remuneration committee would also verbally report to the board. So the board would have been fully engaged in the outcomes.

249

Chairman

And this would be decided over one board meeting or over many when it would come up?

250

Mr. Eugene Sheehy

There was, I think, in all about 40 different schemes that the remuneration committee had to opine on, you know, in seven different countries. So they looked at all of those schemes.

251

Chairman

I would understand that the remuneration committee would be looking at this quite extensively because that’s their job but the board would be the board that would sign off on it. How long would the board give to considering this issue then, because ultimately they have to sanction it?

252

Mr. Eugene Sheehy

Well, I would be out of the room.

253

Chairman

Okay.

254

Mr. Eugene Sheehy

Okay.

255

Chairman

Okay.

256

Mr. Eugene Sheehy

But the … they certainly took time on it. The … they would be other … the remuneration committee is made up of non-executive directors.

257

Chairman

I am aware of how the structure is. And at the senior board level, was there any dissenting voice there? Somebody says look, maybe this is too much this year, maybe there’s … you know, we need to kind of make a measured approach. There’s a lot of concern out there. Maybe we should defer it. Any of this—–

258

Mr. Eugene Sheehy

The full board was aware of my views because I briefed them on it many times, that AIB’s policy, my policy and the chairman’s policy was to be below the median in the market. And that’s borne out, very clearly, in the Nyberg graph.

259

Chairman

I just want to deal with a couple of issues there just before we tidy up before the break. This relates to the quality of the business model, setting process, just to tidy up there from some of the questions that may be outstanding before we go for a break.

260

We will be referring to core documents AIB B2, Vol. 1 and that is AIB reference 01278, page 19, paragraph two. What I want to explore with you, Mr. Sheehy, here is the development of the bank’s business strategy. I would imagine that this is one of the main responsibilities of the board and try to maybe establish with you how much board time was being taken up with regard to the strategy. And the sort of time that was devoted to discussing the development of the sustainable business strategy. So maybe just to begin with that question, how regularly and how often was the business model that was being operated under your tenure being discussed at board level?

261

Mr. Eugene Sheehy

Chairman, you’ll see from the board minutes that there was in almost all board meetings a business presentation. What we tried to do, given the diversity of the business, was to bring a business to the board every month and say here’s this business this is how it’s going. So all the businesses were run through, you wouldn’t get through them all in one year, what their strategy was, what the market conditions were and that included a property business as you know there was … they did two or three of those presentations. So the board wanted and demanded to meet businesses and to get a strategic view of where those businesses were going. So that was an ongoing process and part of the planning process. In relation to the overall strategy of the board … the board obviously got the annual budget and it got a rolling five-year plan as well and to some degree they were linked to remuneration.

262

Chairman

It’s not really on the remuneration issue I’m talking to you, Mr. Sheehy, it would be in regard to the concentrations in property sector lending this is a sustainable business model was there commentary on the board, like we’ve heard testimony from other witnesses here about what’s called the “grow-fast model”. Was people saying that we’re now begin to mirroring the grow-fast model, that our concentration levels in particular sectors, particularly property, are maybe growing beyond what would be the traditional approach that we’ve taken? Was there any … because our examination records are not indicating that, so maybe there’s something that we’re not seeing that you could tell us this morning that would demonstrate that these concerns were being expressed at AIB level … at senior board level.

263

Mr. Eugene Sheehy

The property lending strategy was discussed very frequently and formally, during the credit reviews and you will see a lot of detail in the credit reviews. So … you know … it was always there.

264

Chairman

I’m sure it was discussed and maybe it was discussed in the context that “We’re going to have another bumper year this year, that our growth is going to be X and all the rest of it and that our lending targets are being reached”, if there were targets in place and so forth, but was anybody at board level saying there is a concern here with how the business model is developing?

265

Mr. Eugene Sheehy

Well … those questions were all asked in the context of the credit report, you know the, the half-yearly credit report. Just in … to put a bit of context on it, Chairman … the Republic of Ireland business accounted for 43% of the group profits and the property division in the Republic of Ireland accounted for 25% of ROI’s profits. So you’re talking about between 13% and 15% of the group profits related to this part of the bank that caused, you know, our demise, effectively. So the board had a lot of things to look at but they did look at the property concentration and general what’s the view on the market, what are we hearing from our customers, what’s the macro indicators. That was a constant, as you can imagine, a constant part of the dialogue of the board.

266

Chairman

Okay, maybe jump forward a couple of years so, and I want to refer to the … because I’m still looking at the adequacy of board oversight in regard to internal controls and to ensuring that risk was properly identified, managed and monitored which is what we’re talking about now. And I’ll go to core document AIB B17 … B1 … page 79 and 80. And this relates to EC, under EC treaty rules the bank was obliged to submit a restructuring plan to the EU Commission and this was finalised in April 2010. It was further updated in 2011 and further revised again in 2012. Now the question I’m putting to you here, Mr. Sheehy, in it’s revised 2012 EU restructuring plan, paragraph 3.9, AIB acknowledges that its decision to expand into property was misguided and that its risk management and internal governance systems were not as effective as they should have been in controlling this risk. Now could you please comment upon this and maybe come to them in regard to your earlier comments to me as well.

267

Mr. Eugene Sheehy

Certainly, Chairman, I mean its a 2012 document. Obviously, I didn’t write it and it, it’s a hindsight view of what happened and … you know … we got the property decision wrong. So—–

268

Chairman

So would you believe that, going back to our earlier discussion on the earlier question, that at board level, was there enough attention being paid or was there enough cognisance of the concerns that may have been operating in the banking model operated by AIB at that time?

269

Mr. Eugene Sheehy

The board and the senior management took the thing very seriously, we talked about it all the time, it was not neglected as an issue. So I do think there was a proper focus of attention on it.

270

Chairman

And would you see the comment you just made to me as then being congruent with the position that AIB acknowledges its decision to expand into property was misguided and that its risk management and internal governance systems were not as effective as they should have been in controlling this risk?

271

Mr. Eugene Sheehy

Not as effective but not for—–

272

Chairman

Which an examination of that period as opposed—–

273

Mr. Eugene Sheehy

Not as effective as it should have been but not for lack of effort.

274

Chairman

Okay but you would see that … both your position and this position as being congruent?

275

Mr. Eugene Sheehy

Yes.

276

Chairman

Okay, thank you very much. I now propose that we take a break and that we return at 11.25. Is that agreed? Agreed.

277

Sitting suspended at 11.06 a.m. and resumed at 11.28 a.m.

Chairman

Okay. Everyone back in the room and seated and, this is to remind myself as well, with their phones readjusted to flight mode. We will resume business, okay? All right. So, I am now bringing the meeting back into public session. Is that agreed? Agreed. And just one other matter there, Mr. Buckley, before I bring in Senator O’Keeffe, is if I could just come to yourself, maybe just to explore and get some understanding of the access … the relationships had … the access and relationship particularly how … the relationship that AIB had with the Financial Regulator, the Central Bank and the Department of Finance, okay. And a … the nature and the appropriateness of that relationship between the Central Bank, the Department of Finance and the banking institutions, in this specific case, AIB. What did you see, Mr. Buckley, as the main purpose and indeed the main outcome of the round-table discussions held with the Central Bank post-publication of the financial stability reports from 2004 onwards?

278

Mr. Michael Buckley

Chairman, I don’t have a very clear recollection of those round-table events or of their connection with the financial stability report. I do remember one, and there may only have been one in my time of those meetings, I do remember one meeting to which all of the chief executives and local managing directors of the banks were invited by the chairman of the Central Bank. I think I have alluded to something I said at it in my … in my … in my written statement and my recollection at that meeting, if I am right, if that is the meeting you are alluding to, or one of those meetings, is that it was a meeting at which the chairman of the Central Bank would’ve gone through that report and would’ve asked those in the room to … whether they had any comments or whether they had any issues, would’ve talked about the banking market in very general terms. So, I would have recalled it as a pretty unstructured meeting in itself. If that’s answering your question—–

279

Chairman

And during that time, because I know you retired in 2005, but how would you maybe characterise the bank’s relationship with the Financial Regulator in the period from 2003 until 2005? Mr. Gleeson gave a kind of analogy last week about referees and the relationship, that teams on the pitch have a referee. How would you describe your relationship?

280

Mr. Michael Buckley

Well, if I could start on—–

281

Chairman

Mr. Gleeson, my apologies. Mr. Gleeson, yes.

282

Mr. Michael Buckley

If I could start in 2002, Chairman. My first big interaction with the Central Bank in its prudential role was in 2002 when we had the Allfirst fraud. As you can see, it has marked my recall of my whole time as CEO, but there I found …. what happened at the stage was that we had to deal with a whole lot of regulatory intervention from the Federal Reserve in New York because, remember the fraud had happened in a US-regulated bank with a subsidiary of ours and the local regulator, and what I found was that there was a very professional, very thorough approach adopted by both of the regulators. They worked together, very closely, we had to sign up a memorandum of understanding, we had to undertake a very detailed programme of remedial action. That programme was given oversight by a man called John Hyman, who had been the previous controller … one of the previous controllers of the currency in the USA. So, and we worked our way very thoroughly. I put one of my most senior executives full time on making sure we met all the requirements. So, in that case I found the regulator acting, if you like, in its prudential mode, behaved very professionally.	283
The second thing, I’d say, and I am sorry if I’m taking too long but I just want to give you a balanced account. In the FX charges and related issues that came up during 2003-04 which Deputy O’Donnell has already referred to, I found that the regulator which at this stage was on the conduct side, the customer side of it, was very proactive, was very demanding, rightly, as I would say. And again, I found that we got into that way of independent investigation, independent oversight, we had a former Comptroller and Auditor General involved, we had a former Governor of the Central Bank involved. And I found that that relationship was properly demanding from the regulator.	284
Now, other than those two big crisis events, I would have interacted with the regulator … and other than the meeting that you mentioned in the beginning … I would have interacted with the regulator a couple of times a year when our interim results were coming out and when our annual results were coming out, the process was that myself and my finance director would go in the day before, before we made the market announcement, into the Central Bank and have a meeting with the prudential side of the Central Bank. We would present our results to them, they were … if you like … we were open to any questions they would ask us and I suppose my recall of those meetings is that … and I think I mentioned this in my written statement, that they weren’t very demanding, they weren’t very probing. So, they are my three bits—–	285

Chairman

Sure.

286

Mr. Michael Buckley

—–if you like, of my answer.

287

Chairman

So, during the visits by the Financial Regulator, did the bank ever contact the … subsequently then financially … or contact the Financial Regulator or the Central Bank Governor directly in respect to any issue arising from a supervisory visit from the Financial Regulator to your bank?

288

Mr. Michael Buckley

Well, we would have had, I suppose, my recall of all of that time, is that we would have had a huge amount of interaction, largely like to a fairly considerable extent through our head of compliance at the time but that there was continuous interaction on any issue which raised, if you like, conduct problems or where we were investigating issues that had been raised directly or by us with the Central Bank. We would have a lot of interaction—-

289

Chairman

Mr. Gleeson, in his testimony last week, as I said, familiarised or kind of similarised the role of the regulator as being something like a referee. Now, if to develop upon Mr. Gleeson’s analogy of … a sporting analogy, referees in different codes of sport have different responses to them. In rugby, if the captain acts, operates in a very, maybe, described as a gentlemanly sort of role with the referee, and in soccer terms, maybe the players go nose to nose with the referee. What sort of approach did the AIB take, if they had concerns, as to how the refereeing was taking place, and Mr. Gleeson was saying that it was a very competitive market and the referee should have stepped in to calm things down. But players themselves have a responsibility to come to the referee to say … at any stage, did you go to the regulator’s office and say, “The model as it is developing at the moment, is of concern to us and we would like you to make an intervention”?

290

Mr. Michael Buckley

No, I didn’t, Chairman, and the reason I didn’t is that I didn’t believe myself that the model was seriously out of kilter during my time.

291

Chairman

Thank you. Senator O’Keeffe, ten minutes.

292

Senator Susan O’Keeffe

Thank you, Chair. Mr. Buckley, can I ask you specifically on page 8 of your statement, you say there were periodic requests from the Central Bank Financial Regulator, usually addressed to the chair of the AIB, raising concerns about and asking for reports on the mortgage market and AIB’s lending strategy in relation to it. Can you tell us what sort of concerns were being raised at that point? And specifically, the concerns that they were raising.

293

Mr. Michael Buckley

Okay, okay. I can remember during my time a couple of pieces of work that the regulator had asked us to do on mortgages and essentially the concerns that the regulator was raising was, you know, were we happy that the level of risk we were taking on in the mortgage market was appropriate. Now, could I give you a little bit of background … only … I know you don’t have much time.

294

Senator Susan O’Keeffe

I don’t and I just specifically want to know what the concerns were, Mr. Buckley.

295

Mr. Michael Buckley

The concerns were generalised concerns about the mortgage market where LTVs in particular were going, loan-to-value ratios and our response – we would have been a bank who was dragged up the curve by the market in terms of LTVs, because the pace was set by Bank of Scotland, by Ulster Bank, other banks like that and I remember very clearly that our reports back to the regulator would say, “Yes we do give some 90% mortgages”, of whatever number we would have been using, but we are very careful that our policies in relation to giving those sort of mortgages confined them to either to applicants, who are in a special place by virtue of their jobs and their career prospects, let’s say, people in certain professions and second of all, people who were getting significant support from family sources to, in a sense, supplement deposits and things like that, or supplement their repayment capacity.

296

Senator Susan O’Keeffe

Was the Financial Regulator concerned about anything that AIB was doing?

297

Mr. Michael Buckley

No, not specifically.

298

Senator Susan O’Keeffe

Not specifically—–

299

Mr. Michael Buckley

No, these would have been all sort of industry-wide requests that would have been put out and we would have been responding in terms of our business model.

300

Senator Susan O’Keeffe

Thank you. Mr. Sheehy, when Mr. Forde was with us here last week, he said that there were meetings going on all over August and September, that there was rising concern in the bank, there were management meetings at the weekend and so on. So, he said … I asked “Was there a very clear understanding that things were getting very serious?” “Yes”. “For everybody including yourselves?” “Yes”. “And that it could be fatal?” “Yes, that’s fair enough to say”. What would you say to that remark that Mr. Forde made, as a colleague of yours?

301

Mr. Eugene Sheehy

Well, it’s absolutely accurate. If the system is moving towards a condition where there is no liquidity, it is absolutely fatal, for everybody.

302

Senator Susan O’Keeffe

In that situation, the bank went ahead as discussed earlier and paid the dividend, because it had been agreed … I think you told us in June, July?

303

Mr. Eugene Sheehy

Contractually obligated—-

304

Senator Susan O’Keeffe

Contractually obligated.

305

Mr. Eugene Sheehy

—–from July onwards.

306

Senator Susan O’Keeffe

So, you yourselves were in a declining situation at that time, you were having meetings, you were concerned about the fate of the bank, there was … but you still had to go ahead and pay the dividend. Have I understood that correctly?

307

Mr. Eugene Sheehy

You’re mixing two things. You’re talking about solvency and I’m talking about liquidity. The liquidity issue was what was of concern—–

308

Senator Susan O’Keeffe

So—–

309

Mr. Eugene Sheehy

—–but if you had had no liquidity, absolutely no liquidity, you would become insolvent.

310

Senator Susan O’Keeffe

Yes, and so that brings us back, I suppose, perhaps to the remark that is attributed to you that night … that … about the bankruptcy remark that you’ve discussed earlier. Is it possible that in that context, you may have been arguing that, well, if we are illiquid, we will be insolvent?

311

Mr. Eugene Sheehy

No, that’s not what I said. We were solvent. The system in general and globally was entering into a condition it had never been in before. We had to do something about it. That’s what we said to the Government.

312

Senator Susan O’Keeffe

Why—–

313

Mr. Eugene Sheehy

But it wasn’t … we had no concerns, no concerns—–

314

Senator Susan O’Keeffe

You had no concerns.

315

Mr. Eugene Sheehy

—–about solvency.

316

Senator Susan O’Keeffe

Okay. Why did Bank of Ireland and AIB ask to meet Government rather than Government ask to meet you or, again, have we understood that correctly from the contemporaneous note, that you guys made the request?

317

Mr. Eugene Sheehy

We made the request, yes.

318

Senator Susan O’Keeffe

Why did you make the request?

319

Mr. Eugene Sheehy

Because 29 September was the most tumultuous day in the history of international financial services and we were a part of it.

320

Senator Susan O’Keeffe

Had the Government made any indication that day or the previous day that they wanted to talk to you?

321

Mr. Eugene Sheehy

I think I was talking to officials every day, probably continuously, for 30 days before that. I mean, there was a daily dialogue, there was a daily update on liquidity to the Central Bank. It would be wrong to say there was an event and then a break, it was a continuous contact and dialogue.

322

Senator Susan O’Keeffe

So, forgive me, I want to go back and clarify the matter about what you actually brought to that meeting because both the contemporaneous notes, yourselves and Mr. Gleeson, you say “We had drawn up an alternative form”, and he refers to … he said, you know, that the Government … “We had an extensive formula which was eventually adopted later in the night pretty well word for word”. They were your contemporaneous notes in 2008, both of you. In 2015 both of you now are arguing that it was, a piece of paper in Mr. Gleeson’s case, torn out of a notebook, in your case, I think you said this morning, a slip of paper. So I’m just … I am confused. I believe other people may also be confused, so if you could clarify your contemporaneous note versus your recollection now.

323

Mr. Eugene Sheehy

I don’t think I say in my contemporaneous note that I brought a form.

324

Senator Susan O’Keeffe

You say “We had drawn up an alternative form” on page 3 of your contemporaneous note.

325

Mr. Eugene Sheehy

And that may have happened in the anteroom that we were in. The honest answer … I cannot remember the piece of paper. We were certainly in dialogue with the Government about technical issues of what should be in, what shouldn’t be in, we could have written it out. I have no piece of paper as a record of the night other than my note. If we wrote something down we might have handed it over but it certainly would have been a very informal piece … if it happened, and I’m not going to try to read into the record something that I’m not sure of. I just don’t remember it.

326

Senator Susan O’Keeffe

What was it you wanted to see Government about then? Why did you want to go … if it wasn’t with something in your hand, and you say it wasn’t, then what did you go to do?

327

Mr. Eugene Sheehy

Well, we felt that on the day, the 29th, with everything that happened globally, that we needed to see the Government, because we were looking at what was going to … what could happen if you did nothing. That’s the problem. What would happen if you did nothing? The Government had already brought out a guarantee on the 20th, which was quite a substantial increase on the previous one. We had adequate liquidity and when we say that we have enough liquidity ‘til the end of October or five or six weeks, that assumes that you never get another cent. That’s a kind of a … you know if you keep on funding that keeps on moving out. But you have to take a point in time. The point in time situation was that if the markets froze totally, and there was no reason for an observer, looking at 29 September, to say “I know what’s going to happen tomorrow” because nobody knew what was going to happen tomorrow.

328

Senator Susan O’Keeffe

Okay.

329

Mr. Eugene Sheehy

So we felt we had to go to the Government and say “Look, this is what we see out there. We … you know, something needs to be done to stabilise the situation”.

330

Senator Susan O’Keeffe

You’ve all remarked, pretty much everyone that’s come here before us, that you were all very surprised at the fact that all the banks were included. When you heard all the banks were included on the following morning, did you call anybody, did you ring the Department of Finance, did you have any … “My God, what’s happened, why did you do that? We left thinking it was four and now it’s six”. Or did you just sit down and go “Well there we are”?

331

Mr. Eugene Sheehy

The Government had made a decision. We weren’t going to start coming out and criticising it in … with the focus that was on the country at the time …

332

Senator Susan O’Keeffe

No, I’m sorry, with due respect, Mr. Sheehy, I didn’t ask you to … if you’d came out. I asked you if you were on the phone to anybody asking “Why?”, “What had happened?”, “What had changed?”.

333

Mr. Eugene Sheehy

The only calls I remember making the next day were about pricing issues in London, which were quite problematic, in relation to deposits. You know, we had a big retail deposit base in London. They were the only calls I made.

334

Senator Susan O’Keeffe

So you’d argued to have the other two banks excluded but when they were included, you just got on with it?

335

Mr. Eugene Sheehy

We had no choice.

336

Senator Susan O’Keeffe

Can I ask you whether you personally ever invested in property?

337

Mr. Eugene Sheehy

Never.

338

Senator Susan O’Keeffe

Okay. Were you ever in the Galway tent?

339

Mr. Eugene Sheehy

I was in the Galway Races I think in 1969 but I was a young fellow at the time.

340

Senator Susan O’Keeffe

You were. Did you ever have hospitality with property developers?

341

Mr. Eugene Sheehy

No. I met, I think, two developers in the space of my tenure. One was just a courtesy call to a meeting, somebody who I dealt with when I was a branch manager 20 years before, and the other one was a serious meeting of a developer who owed us a lot of money and I wanted to make the point with the team that things were serious and he would have to—–

342

Senator Susan O’Keeffe

Finally, Mr. Sheehy, this morning … you apologised and Mr. Buckley expressed regret, and yet listening to some of the remarks today, I’m still not clear what you’re apologising for.

343

Mr. Eugene Sheehy

Well, I’m very clear. We took too much risk in a sector that turned out to be toxic. I was CEO, I could have stopped it. That’s what I’m apologising for.

344

Senator Susan O’Keeffe

You could have stopped it?

345

Mr. Eugene Sheehy

In theory, yes.

346

Senator Susan O’Keeffe

But you didn’t.

347

Mr. Eugene Sheehy

Correct.

348

Senator Susan O’Keeffe

Thank you.

349

Chairman

Deputy John Paul Phelan. Deputy, ten minutes.

350

Deputy John Paul Phelan

Thank you, Chair. Gentlemen, I just want to follow on from that question from Senator O’Keeffe in relation to decisions that could have been made, that Mr. Sheehy has just referenced. Was there any point in your own tenure that you expressed concerns about the concentration of lending in the property and development sectors that you can recall?

351

Mr. Eugene Sheehy

I was comfortable enough with it until early ‘08.

352

Deputy John Paul Phelan

To go back to previous questioning about the guidelines that existed from the Financial Regulator, and, you know, on concentration limits, 200% for a sector and 250% for two related sectors. The constant answer that we’ve had from other witnesses, including yourselves, is that, you know, a changeover was taking place to Basel II. Did you not, or did you, have any personal qualms about the fact that not only was AIB breaching those sectoral requirements while you were chief executive, but that the breach actually grew once it had been pointed out?

353

Mr. Eugene Sheehy

Well, first of all I was glad I was aware of it and that it was formally reported and dealt with, you know, in above-board fashion. I took comfort from the fact that it was in transition and it’s not possible to totally ignore the context of what you’re doing at the time, which was an absolute change from that model, of a kind of a stock percentage model, to a risk-based model. That was what we signed up for. We were in the process of a formal application to change. We were in constant dialogue about what that involved, how the models would work and the regulator was in touch with us. So, point in time, you know, you can say this was happening but there was also a continuous activity going on, changing from that model to another one, with both sides who were involved in it totally participating.

354

Deputy John Paul Phelan

Outside of the continuous … I can’t remember the exact quote but to paraphrase you, you said that “The issue of sector lending was discussed at board level a number of times”. Were there any concrete actions, ever, in your time, from the board of AIB … decisions on addressing the issue of over concentration in the construction and the property sectors?

355

Mr. Eugene Sheehy

Well you can see from some of the board minutes the … when the credit people reported in the half-yearly reports, they would be asked to come back with more information about residential development, and then there subsequently was a … there was a presentation on that. So there was a dialogue, requests, requests to come back and that happened.

356

Deputy John Paul Phelan

But was there … were there any concrete actions taken following that dialogue which took place over a long period of time or was it just continuous dialogue with no actions?

357

Mr. Eugene Sheehy

Well, there are always actions and, you know, in the risk and credit functions and the sector teams there was constant change in terms of trying to develop better MIS, getting more market intelligence about what was happening. So it wasn’t a static thing, it’s an organic thing, you’re constantly changing … the market is constantly changing, you’re constantly trying to grapple with the conditions when the loan was made, the conditions now, you’re reviewing the loan, you’re looking at the customer’s cash flows, so it’s … it’s quite an organic and dynamic process.

358

Deputy John Paul Phelan

But taking that into account, how then did the concentration continue to grow in that sector right up until virtually the edge of the collapse?

359

Mr. Eugene Sheehy

Well, towards the back-end of the collapse it was simply the market freezing and that … there was interest roll-up because there was cash flow problems generally in the second half of ‘08. Prior to that, we … our application went in in January ‘08 for Basel, which was accepted. The regulator didn’t change the sector limits at the same time as they got the application and accepted it, that would actually change those limits, and you can see from subsequent correspondence that they intended to engage in a series of meetings to change those limits all the way up to 2010, but those discussions have never happened.

360

Deputy John Paul Phelan

Can I just change for a second briefly to ask you, Mr. Sheehy, in relation again to your time as chief executive, the targets that were set by the board in relation to earnings per share, did you feel at the time and in the context of where the market was, that they were sustainable?

361

Mr. Eugene Sheehy

You will see from my written statement that in September ‘05, I changed when I wrote to the divisions for the planning cycle. There was a five-year rolling view of EPS growth, which was 12% compound, and I moderated it at that time. I stated why I wanted to moderate it. There are all sorts … there is a mathematical reason, obviously it gets harder to grow on growth. That is one thing. The UK was beginning to soften. We had the three big regulatory projects coming down which were going to cost … they did cost in excess of €200 million. There was salary cost pressures all the way through the bank because of competitive forces and funding was getting more expensive, so I took it down from 12% to 10%, which is the same as putting an average growth back from 15% to 12%. So I did moderate it because it wasn’t sustainable and just as a by the way, changing that measure of five-year plan eliminated the possibility, if those plans were met, of all the LTIPs, the long-term incentive plans, vesting. They couldn’t vest because the plan now was less than the minimum hurdle required for them to vest, which was CPI plus 10% compound.

362

Deputy John Paul Phelan

Can I ask you in relation to the night of the guarantee and the quote that was put by the Chairman and Deputy O’Donnell in relation to the memo? You have more or less … well you have said that you can’t recollect using the phrase. Would it be in your view, or not, a fair statement to say that an official of the Department of Finance who obviously took that memo could have interpreted your comments on the night to mean that there were bankruptcy issues facing AIB in the immediate term on that particular night?

363

Chairman

The document that was displayed earlier, Deputy Phelan. Yes, okay. Fine.

364

Mr. Eugene Sheehy

Well, you know, as far as I’m concerned, AIB’s solvency was never discussed at the meeting, and as I said, if words like that were used it was in the context of a systemic failure arising from no liquidity for the system.

365

Deputy John Paul Phelan

Can I ask, did you see Mr. Gleeson’s testimony to the committee?

366

Mr. Eugene Sheehy

I did, yes.

367

Deputy John Paul Phelan

Is there anything in it that you disagree with?

368

Mr. Eugene Sheehy

I can’t recall … I mean, I mentioned my view of the regulator. That was one issue between us. He doesn’t feel like that. No, I don’t recall anything in particular.

369

Deputy John Paul Phelan

Was there ever a time when you were working with him, when he was your chairman, that he overruled a position that you held on lending concentrations within the bank or on the general direction of the bank?

370

Mr. Eugene Sheehy

No, there wasn’t.

371

Deputy John Paul Phelan

And was there any point in your time that you yourself held the view that sectoral concentrations in construction and development were too high and you wanted to take the bank in a different direction?

372

Mr. Eugene Sheehy

No.

373

Deputy John Paul Phelan

I briefly wish to turn to Mr. Buckley. You stated, and this reference was made earlier – B1, Vol. 1, page 16. It is the Jim O’Leary quote again, which was from a minute from 13 January 2004. You said that there was a presentation to the board following on from that in October 2004. Was it customary that it would take nine months to act on a reservation expressed by a pretty senior economist who was a member of the board, who raised significant concerns in … at the start of 2004?

374

Mr. Michael Buckley

I don’t recall why the presentation came in October, and I don’t know. Could I look at the minutes?

375

Deputy John Paul Phelan

You can. Yes.

376

Chairman

Yes.

377

Mr. Michael Buckley

I am sorry, Deputy, this is a—–

378

Deputy John Paul Phelan

It is a redacted page.

379

Mr. Michael Buckley

Yes.

380

Deputy John Paul Phelan

It is B1, Vol. 1, page 16.

381

Mr. Michael Buckley

Sixteen.

382

Deputy John Paul Phelan

The only thing that’s not redacted is the reference to Jim O’Leary’s comment.

383

Mr. Michael Buckley

Okay. I … so what the minute says is on the suggestion of Mr. O’Leary it was agreed that policy in respect of lending to the building and construction sector should be reviewed by the board in the near future. So, I would just say that what it doesn’t say is that Mr. O’Leary expressed serious concerns about our approach to property and construction. He wanted a presentation, a complete presentation, so that—–

384

Deputy John Paul Phelan

Do you believe it was satisfactory that … I have only four seconds left—–

385

Mr. Michael Buckley

Sorry.

386

Deputy John Paul Phelan

—–that it took nine months for an action to be taken on what was an issue being flagged at least at that time?

387

Mr. Michael Buckley

Sure. But I don’t know that it was being flagged in such an urgent way that it required a presentation the next month. I don’t know, Deputy. I mean, I think you make a fair point. I just don’t remember why it took eight or nine months but when it came it was an incredibly detailed presentation, which is maybe one part of the explanation, and the credit people as well as the business development people were there together so that everybody on the board could get a sense of the balance.

388

Deputy John Paul Phelan

Were there actions taken on foot of the presentation?

389

Chairman

Your final question now, Deputy.

390

Mr. Michael Buckley

Well, when the presentation was made, there was an opportunity for the board to discuss any aspect of it, and the board did not look for any change in policy or anything of that nature as a result of the presentation, and that includes the person who asked for the presentation in the first instance.

391

Chairman

I just want to—–

392

Mr. Michael Buckley

So I’m assuming they were all happy.

393

Chairman

—–just return to the issue of the earning per share there that Deputy Phelan raised with you. Would it be fair to say, just as an outsider, who may be analysing a bank’s performance, that the earning per share that a bank would be delivering would be a key performance indicator by which investors might actually judge the relevant attractiveness of a company as an investment opportunity?

394

Mr. Eugene Sheehy

I think among the analyst community it was by far the most important one.

395

Chairman

Top of the pyramid, you reckon, yes.

396

Mr. Eugene Sheehy

In the dialogues that you would have with them in investor meetings it was very important … because it was a reflection of everything that happened in the organisation.

397

Chairman

Okay. So in that regard, was it your view that the levels of earnings and the … in earning per share growth targets set by the board, given the maturity of the market, what was your view on that? You were setting quite significant targets as to what the return should be in this, which would be attracting investors.

398

Mr. Eugene Sheehy

Well, in the first instance I reduced the targets and the board accepted the reduction.

399

Chairman

Okay.

400

Mr. Eugene Sheehy

At the time the market … we would have been coming in at below the averages in the market. We weren’t as fast growing as the medians and that was another one of the reasons why the long-term incentive plans never vested. So, the commentators and investors would have regarded our guidance to the market as moderate.

401

Chairman

And was the earning per share in terms of how the dividend would be arrived at, was that driven or did it have a reliance on the property and construction lending that AIB were engaging in? How related or relevant would it have been to that?

402

Mr. Eugene Sheehy

The property and construction was obviously a component of it but, you know … so 43% of profits came from ROI, one quarter of them came from the Irish property book. No matter what way you look at it, it wouldn’t have been significant enough in a weighting to drive the number significantly. I mean, we were actually growing faster throughout this period in capital markets and Poland than we were in Ireland.

403

Chairman

Okay, thank you. Deputy Joe Higgins.

404

Deputy Joe Higgins

Gentlemen, can I ask you if you’re aware of the testimony of Professor Bill Black to the inquiry?

405

Mr. Eugene Sheehy

I am.

406

Deputy Joe Higgins

Yes. In his testimony, Professor Black, who was a renowned regulator and prosecutor of financial institutions that failed in the United States, said that there was a recipe which banks followed which … that if banks followed, which would “produce the worst losses and is most likely to cause hyper-inflated bubbles” and that recipe includes grow like crazy, and he mentions 25%, and he mentions growth way ahead of economic growth nationally, and also make terrible quality loans. And Professor Black, you will have seen, said three sure things follow: record profits from the institution, then, quote, second: “Under modern executive compensation the senior leadership will promptly be made wealthy” and three, catastrophic losses. Now, gentlemen, can I ask you both, in view of the fact that Allied Irish Bank’s growth in 2004 in its balance sheet was 25%; 37.5% in 2005. The bank made record profits in those years. The remuneration of senior personnel was at record levels and then there followed a huge crash. Do you recognise Professor Black’s analysis in terms of Allied Irish Bank and do you agree with it?

407

Mr. Eugene Sheehy

Thank you, Deputy. I think most of Professor Black’s observations were based on his US experience, and he did make references to liar loans and the like. In general terms, you know, he is trying to transfer the … his US observations into the Irish market. When you look at, you know, what he said, if you do grow loans and there is a market crash, which is a one-in-100-year event, banks are going to suffer greatly. Banks absorb the risk between short money and long money and when there’s a problem of that nature, it will materialise in falling asset values and problems for banks. So, in general, I agree with his observations. In AIB, our economy was, in those years, held up as probably the highest-performing economy in the world. Our demographics were totally different to the market that he was drawing reference to. So, some of his analogies, you know, are right, but I think the basis from which he is extrapolating one observation to another is fundamentally unsound because it was a different, totally different, economy.

408

Mr. Michael Buckley

Deputy, would you like me to—–

409

Deputy Joe Higgins

Yes, briefly, thanks.

410

Mr. Michael Buckley

—–talk about my time in respect of that. I’ll be very brief. The point I would make, I’ve made it in my opening statement, which is that in the period that I’m talking about, up to this time, 2005, you know, we were in – we, as in the economy – was in a big, big catch-up phase. I mean, you can’t ignore the fact … sorry, one can’t ignore the fact that the population did increase by a million over that period of ‘71 to 2001; that the labour force had increased by 32%; that the employed population had increased by 49%. I mean, people had to be housed, they had to go shopping. They were moving into urban areas from the country on a continuous basis, so I think the Irish economic situation was a bit different to, if you like, the model that … I haven’t read his testimony, but—–

411

Deputy Joe Higgins

Can I put it to you, gentlemen, that already by the 1990s there was a substantial body of study of banking crises internationally, which had all the features, virtually, of what happened in Ireland? Mr. Black, for example, supplements … or his analysis is supplemented by an article written in 1993 by two Berkeley professors, one of whom, George Akerlof, in a Nobel laureate. I don’t expect you or I … my question isn’t predicated on you having read this article. It is referred to by Professor Black in his evidence. The article in question, “Looting: The Economic Underworld of Bankruptcy for Profit”, lays out precisely the strategy I have discussed. I quote from that article:	412
Our theoretical analysis shows that an economic underground came come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. Bankruptcy for profit occurs most commonly when a government guarantees a firm’s debt obligations.	413
That was in 1993. Mr. Sheehy, could I ask you why, considering the substantial body of literature that exists and analysis, which I don’t have time to go into, why were you chief regulators, or risk officers, and indeed yourselves, as senior officers, were you aware of this analysis of banking crises? Even Sweden, a few years before you came in to—–	414

Chairman

Deputy, I’m going to have to allow time for a response as well for the questions made.

415

Deputy Joe Higgins

Yes. Why would you not have been aware of this, or were you?

416

Mr. Eugene Sheehy

The premise of your question was that people go into banks to loot the bank or loot the shareholders or loot the State.

417

Deputy Joe Higgins

I was just quoting the—–

418

Mr. Eugene Sheehy

Yes, but you quoted it to me and you framed the question from that quote. That is not the case, never was the case. The people in the bank that I had the privilege of working with, by and large, almost entirely, totally committed to doing a good job and having a long career in the bank. That was what people … that’s what motivated people. I’ve never met anybody in the bank, or in any of … most of the other banks that I’ve met who had anything other than a long-term, stable, repeat business, grow your market share, stay there for the long haul, that’s the way people operated in the bank and all the records and all the references in any of the documents you’d have seen would confirm that.

419

Deputy Joe Higgins

Mr. Sheehy, Professor Black says that there is a perverse incentive for senior executives to increase the balance sheet because it’s linked to their salary and bonuses. The record of AIB, annual reports will show, that your remuneration substantially increased, along with a substantial increase in the balance sheet growth. Was Professor Black correct?

420

Mr. Eugene Sheehy

He wasn’t. As I explained earlier on, the remuneration of the chief executive officer – me, when I was there – was based on market comparisons and norms. I told the remuneration committee and the board – and they knew it very clearly, as did the director, as did the chairman – that I wanted my salary to be the lowest in its peer group, relative to the size of the bank, and that’s in the Nyberg report, page 7, there’s a chart of it there. So, there was no relationship, none whatsoever, between my salary and the size of the bank’s balance sheet. That’s a fact. You can look up the remuneration committee notes. You can look up the terms of the remuneration committee. The factors that went into it, the discussions at the board, there is no connection or validity to what you’re asserting.

421

Deputy Joe Higgins

Mr. Sheehy, between 2005 and 2009 you earned, in salary and bonuses, €7.6 million, which would take an industrial worker 190 years to earn. In view of the apology you made and the mistakes that were made, which you said, did you consider giving a contribution—–

422

Chairman

Last question, Deputy.

423

Deputy Joe Higgins

Did you consider giving a contribution to the taxpayer from that amount of money? And, lastly, you were obviously a substantial lender to homeowners, owner-occupiers. The fact that the price of a home was increasing by the equivalent of the average industrial wage each year from ‘96 to 2006, putting young people, by common consent, in a dreadful situation of up to 40-year mortgages, unsustainable loans—–

424

Chairman

Deputy, ask your questions, please, because you’re going to run out of time and the Deputy won’t have time to respond.

425

Deputy Joe Higgins

—–did that ever occur to you, as a moral issue, the difficulties that young generation was being put in by the profits that were being made?

426

Mr. Eugene Sheehy

Well, there’s … you’re asking me five questions, I’ll try to … I paid tax on everything I earned. I made a voluntary reduction in my pension after I left. In relation to the creditworthiness of first-time buyers, we followed a strategy of not following the market. We had, I think, 151,000 mortgages; 2,660 were 100% finance, which is less than 2%; the market was 8%. We monitored, on a monthly basis, what a standard application coming into our counter would be,vis-à-vis all our competitors and it was always the lowest. We changed it a little bit towards the end and, if you looked at the published information as at 31 December 2010, in AIB, the 90-day-past-due rate for mortgages, and that’s … 90 day past due is not an opinion, it’s a fact – you have to be 90 day past due to be 90 day past due – was 2.5%, which was by far the lowest in the market. Subsequently, it changed when the bank merged with EBS, who had a different rate, but I think the mortgage process in AIB was best in class. The numbers substantiate that.

427

Deputy Joe Higgins

Do you agree that the level of—–

428

Chairman

Deputy, you’re completely and totally out of time, and I need to come back to a question now that we need to ask, which is related to this. And that is the appropriateness or the credit policies operating … because the grow-fast model … or whether a sustainable model is in place, a bank will always want to be profitable and the … as does any other business … and to do that it has to grow its business, and in banking terms that means issuing loans. Mr. Sheehy, if I could put the issue of AIB Group’s large exposure policies, this is the GLP as it’s referred to, and the limits as to whether there were hard limits or soft limits … and how exceptions would be granted. And, it could be suggested that exceptions were sanctioned regularly by sub-board committees. Could you explain to the committee what processes and actions were taken to monitor – and I’m referring to core document AIB 2, pages 25 and 35 to 37 – so if you could explain to the committee what processes and actions were taken to monitor and remediate the regular approval of exceptions to the group large exposure policy limits? This would be, kind of, “There is exceptional circumstances here, loan shouldn’t be granted, but let’s look at it again and maybe grant it”?

429

Mr. Eugene Sheehy

Okay, Chairman, just at the start there you said about banks want to grow by growing loans. They don’t actually.

430

Chairman

Okay.

431

Mr. Eugene Sheehy

The less loans you have, and the more profit you make, the better.

432

Chairman

I stand corrected.

433

Mr. Eugene Sheehy

You want to grow by margins.

434

Chairman

Yes.

435

Mr. Eugene Sheehy

But anyway, the group large exposure policy … clearly there was a stratification of risk and levels, and it was built on a principle of the loan originator and the loan sanctioner being separated. So what the escalation of sanctioning – if you go through the various committees – meant was that in each case, first of all, you were going through the committee process because the loans were getting larger, and that’s a fact. And, you know, we talked about a big loan earlier on. But to me there was a benefit of … in this process, which was you got fresh eyes at each level, and feedback and interaction. So the group large exposure policy, and the passing on of when people went over certain limits into their next level was, I think, is a positive process in looking at risk. It’s a positive process. It can look, because the loans are bigger, as just some kind of a default thing that as it gets bigger it just goes up and gets approved. That’s not the case. As it goes up, it gets further and further interrogated before it’s approved.

436

Chairman

Mr. Daly, in his testimony to this inquiry last week, gave a testimony as to what he saw the banking model actually was, and, as has been stated here this morning, when the whole thing came crashing … the debt for AIB, regardless of any other bank’s behaviour, was approximately €20 billion. And I’m asking you to comment upon Mr Daly’s testimony when he says:	437
While internal bank lending documentation may indicate that the loan-to-value ratios were, typically, less than 100% when the loan was drawn, the reality, in many cases, was that a developer’s equity contribution was in the form of a rolling-up of unrealised, paper profit from other developments. This was presented as an equity position. Rarely, if ever, was it in the form of cash.	438
So basically what Mr Daly is implying there … that as a development was under way, its equity was growing probably beyond the original valuation of the purchase or development at the site; therefore, the equity then could be offset against a new development. He then goes on to say:	439
In effect, therefore, the banks were providing all of the real cash funding for both acquisitions and development. It’s safe to say that quite often the borrower’s paper equity position never paid for an acre of land or concrete or scaffolding or a worker’s wage at the end of the week. The safety zone of borrower equity usually existed only on paper. The result is that the borrower was typically not the first to lose. In the event of a crash the banks stood to take 100% of the losses, and that’s what happened.	440
Is that what happened in AIB?	441

Mr. Eugene Sheehy

No. I understand exactly what Mr. Daly was saying. And if you look at a loan application, where an individual could have been in business for 20 years in a trade, i.e. property construction, and has developed a net worth in that business, there are a couple of options open to the individual. They could say, “I’ll cash out here and take my cash off the table,” and try to continue on with non-recourse lending … trying to get that … “Or I’ll leave everything I have in the business”. By and large, to my recall, almost all of the developers we’d have dealt with left everything in the business. Now, then you come to the kind of intellectual argument about is leaving everything in the business the same as committing to the business? It is. I mean, if you have made money over decades and you leave it all in the business, and that is then recognised by the bank as equity, not cash, but as equity, I think that’s entirely correct. And I’ll just go … add a little bit to it. I mean, when I was a branch manager I dealt with a lot of SMEs and start-up businesses, they never had cash. People who go into business rarely have cash, because when you go into a town you’ll see banks lined up on one side of the street, you won’t see “private equity” or “vulture fund” over somebody’s door. The banks provided equity for people who wanted to … provided cash for people who wanted to take risks. And, by and large, that came from a trust-based, personality-based decision, a personal guarantee from parents or supporters. So, you can imagine if everybody … and we had nearly 40% SME customers and builders … if the bank had a view that we would not back anybody unless they had hard cash, and disregard their equity, the person coming to the bank who wanted to start a business, had a house worth €150,000, a mortgage of €75,000, wanted to get seed capital to start off, and we said, “You know what? Go away, we don’t recognise that.” Society wouldn’t be—–

442

Chairman

In fairness, Mr. Sheehy, that’s not the question I’m asking you.

443

Mr. Eugene Sheehy

But that’s the question … that’s what he said.

444

Chairman

No, no, what Mr. Daly is implying is the exposure that your practice actually created. It’s not that you’re giving a few bob to an SME here, or a video shop here, or a health club here. What you were doing was giving compound lending into one sectoral area, one loan after another, after another, that led to an exposure. So a developer built the shopping centre, the equity value in that – no cash transaction – maybe increased by 20%. That 20% then – no cash transference – was used as a notional concept to securitise a new loan to build another development. This was all construction. This wasn’t SMEs, this wasn’t some guy setting up some carpet shop down the road, these were developing loans that ultimately resulted in all these major borrowers having to go into NAMA with massive loans that your bank had provided. So this is an exposure issue. And what Mr. Daly is indicating in his statement – and Mr Daly may well be back before the committee and we’ll get further clarification from himself, and we may call other witnesses back as well – is that the business model operated by banks was creating an exposure in property without any down payment or cash being made. The securitisation was notional equity. Does that reflect the business model that AIB were using? And did it create an exposure?

445

Mr. Eugene Sheehy

It wasn’t a business model. It did happen. And most of the uplift in valuation came from the investment side property. So, if you somebody who was a residential developer, but they had a successful let investment property, you would take an uplift value in that and pass it on. But I agree with Mr. Daly, you know, that it would’ve been a lot better off if the structure … the industry structure in Ireland around property, had more private equity, you know, and I think that’s happening now. It would have been far superior, and it did increase the bank’s exposure, the fact that we released funds on the basis of valuations of uplift.

446

Chairman

Thank you. Deputy Michael … Senator Michael D’Arcy.

447

Senator Michael D’Arcy

Thank you, Chairman. Mr. Buckley, the AIB loans transferred to NAMA, had a discount of 56%. Were you surprised and can you comment on that reduction, please?

448

Mr. Michael Buckley

I wouldn’t have had a view, to be honest, because I didn’t know the circumstances, you know. This was, I don’t … I forget when those loans were transferred to NAMA, it was probably 2011, so six years after I retired. I wouldn’t have had a basis for determining really whether those loans were transferred at fair value or not fair value, so I’m sorry.

449

Senator Michael D’Arcy

The reason I ask you Mr. Buckley was because you had 53 months in as CEO or thereabouts and I think Mr. Sheehy you had a little bit less.

450

Mr. Eugene Sheehy

Yes.

451

Senator Michael D’Arcy

Yes. You seem very arms length in relation to everything. In relation to AIB.

452

Mr. Michael Buckley

I don’t intend to be. I have to say okay … that … I’m sorry if I come across in that way. I mean I’m very happy to explain what happened during … during my time. Six years after my time I think I am entitled to say I don’t really have the information.

453

Senator Michael D’Arcy

Mr. Buckley have you … did you have any retail banking experience in Ireland?

454

Mr. Michael Buckley

No I didn’t. But I did in Poland—–

455

Senator Michael D’Arcy

Did—–

456

Mr. Michael Buckley

Which was a high risk market.

457

Senator Michael D’Arcy

Did Mr. Forde, who was appointed head of retail Ireland, have any retail banking experience?

458

Mr. Michael Buckley

He had moved from AIB capital markets possibly when I was in Poland. I can’t remember but around maybe 1998 or something like that so before he was made managing director he would have been in the retail side of the bank in Ireland for about four years.

459

Senator Michael D’Arcy

And, Mr. Sheehy, how long were you in retail Ireland?

460

Mr. Eugene Sheehy

From 1971 until 1993 in branches then—–

461

Senator Michael D’Arcy

You came up through the system.

462

Mr. Eugene Sheehy

Well I then got involved in … basically technology, and then business change and then managing the franchise, yes.

463

Senator Michael D’Arcy

Mr. Buckley, did you agree with Mr. Gleeson’s statement that retail banking Ireland … the retail banking sector of in the Republic of Ireland bankrupted the AIB?

464

(Interruptions).

Senator Michael D’Arcy

He made that statement last week—–

465

Chairman

Yes indeed and if Mr. Buckley is aware of it he might wish to give a comment.

466

Senator Michael D’Arcy

Are you aware of it?

467

Mr. Michael Buckley

I didn’t actually follow his testimony … and … and I wouldn’t again, I have to say, he was talking about something that happened quite a distance after my time as CEO and I think it’s a judgment that I wouldn’t be in a position to make.

468

Senator Michael D’Arcy

You didn’t follow last week’s … Mr. Gleeson’s—–

469

Mr. Michael Buckley

I didn’t tune into his testimony.

470

Chairman

I need you to be specific in your questions rather than … did someone tune in last week then open up a line of questioning. So follow a line of inquiry please, Senator.

471

Senator Michael D’Arcy

Deputy Higgins quoted Bill Black and Bill Black said that one of the aspects that are crucial for the structure of the banks was “grow like crazy.” Okay. You say, ‘’Grow fast.” That was the term that was used.

472

Mr. Michael Buckley

By me?

473

Senator Michael D’Arcy

I’m sorry. AIB … and I’m putting it at the both of you gentlemen. ‘’Grow fast”. And the figure I want to give you —–

474

Chairman

I need you to be referencing now if you are using comments now back and forth and to put a question to somebody maybe to comment upon it rather than give them the dialogue and then put a question on it.

475

Senator Michael D’Arcy

Chairman—–

476

Chairman

Yes.

477

Senator Michael D’Arcy

Let me go at a different line of inquiry then, Chairman. In 2001 you were appointed CEO. And at that stage then Mr. Sheehy the head of retail was moved to the States.

478

Mr. Michael Buckley

That was the year after in the wake of the Allfirst fraud. Yes.

479

Senator Michael D’Arcy

Figures that we have for AIB’s growth rates were 29—–

480

Chairman

Please …

481

Senator Michael D’Arcy

Briefing document 1, Nexus 1.

482

Mr. Michael Buckley

Is this B1?

483

Deputy Pearse Doherty

No, it’s a briefing document.

484

Senator Michael D’Arcy

It’s a briefing document—–

485

Chairman

Sorry, my apologies.

486

Senator Michael D’Arcy

It’s a briefing document—–

487

Chairman

Has it been supplied to the witness, has it?

488

Senator Michael D’Arcy

Pardon?

489

Chairman

Has it been supplied to the witness?

490

Senator Michael D’Arcy

Well the figure that we were given, Mr. Buckley, was 29% per annum or from ‘01 to ‘08 … compound.

491

Chairman

If the witness isn’t familiar with it, Senator, and if it hasn’t been supplied to the witness I’d like … there is a due process situation here. So maybe if you can … you’re quite willing and prepared to … and you’re quite free to respond to it ….

492

Senator Michael D’Arcy

I’ll move on then Chairman.

493

Chairman

Okay, so then if you could just quote core document AIB B1, page 13, item 6 – 14 to 1917 – that may actually be sufficient.

494

(Interruptions).

Chairman

Yes. I really would be … if documentation is going to be provided at these hearings that they come through the system so that we can actually have them —–

495

(Interruptions).

Senator Michael D’Arcy

That document that was available to me was available to the witness as well—–

496

Chairman

Okay if you could just cite what it is so now and we will use it

497

Senator Michael D’Arcy

I’m using the AIB briefing document.

498

Chairman

Okay.

499

Senator Michael D’Arcy

That 29% increase, Mr. Buckley … there seems to have been a change in AIB’s strategy, which was to grow fast. Could you comment upon that?

500

Mr. Michael Buckley

In my opening statement this morning I … among the things I said was … a point I made that if you rely on percentage numbers when you are looking at growth rates … I’m talking about lending now … that it may be misleading. Because … in my time at the beginning of my time our actual exposure to property and construction overall started at the number of €6 billion … this was for the whole group and it went up during those four and a bit years to €19 billion. And on the Irish side of it within that number it went from €4 billion to €11 billion. And I said this morning that … and I would repeat it again .. that in the context of the demographic situation to which I alluded which was unprecedented in the history of the State, that I felt that at that point we were not significantly running ahead of what was required in terms of infrastructure in the country. So the percentages don’t … how do I say … I don’t work off the percentages. I mean what kills a bank is pounds, shillings and pence lent rather than percentages lent so that’s really my answer. I hope it … it meets your question.

501

Senator Michael D’Arcy

It doesn’t really but—–

502

Mr. Michael Buckley

Doesn’t it?

503

Senator Michael D’Arcy

No.

504

Mr. Michael Buckley

What—–

505

(Interruptions).

Senator Michael D’Arcy

Mr. Sheehy, you made the point that the bank took too much risk. In relation to—–

506

Mr. Eugene Sheehy

I did yes.

507

Senator Michael D’Arcy

Mr. Buckley, did the bank take too much risk in your time?

508

Mr. Michael Buckley

No. In my view.

509

Senator Michael D’Arcy

It didn’t?

510

Mr. Michael Buckley

No. In my view.

511

Senator Michael D’Arcy

From ‘01 increase of the balance sheet for your period to mid-2005—–

512

Mr. Michael Buckley

From … in … property overall from €6 billion to €19 billion … I would say “No”. And from €4 billion to €11 billion in the Republic of Ireland I would say “No” in the context of what the economy required and what customer needs were at the time.

513

Senator Michael D’Arcy

€6 billion to €19 billion, a trebling of the loan book in your period.

514

Mr. Michael Buckley

Well … your into percentages again now.

515

Senator Michael D’Arcy

That was the numbers.

516

Mr. Michael Buckley

So I’m saying in money terms that’s what it was and in relation to the requirement to build infrastructure of housing, roads, schools, shops, offices, that was not an irrational amount of money to be lending into that marketplace.

517

Senator Michael D’Arcy

Can I ask Mr. Buckley also were senior management conflicted by the bonus system and the remuneration that Deputy O’Donnell discussed earlier? And were the focus upon earnings by share and the document I am quoting is AIB B1, Vol. 1, page 45, 31 March 2015.

518

(Interruptions).

Mr. Michael Buckley

This is a document written in 2009 looking back over the whole period.

519

Senator Michael D’Arcy

The Good Times – AIB (1988 to 2007). AIB B1. Vol. 1—–

520

Mr. Michael Buckley

Oh sorry. B1, Vol. 1. I have that. Page—–

521

Senator Michael D’Arcy

Page 45.

522

Mr. Michael Buckley

Page 45 sorry. That I thought there was a document written in 2009.

523

Senator Michael D’Arcy

It says, “Reported EPS [earnings per share] Growth 2003: AIB: 3%—–

524

Mr. Michael Buckley

That—–

525

Senator Michael D’Arcy

… percent

526

Mr. Michael Buckley

Yes sorry—–

527

Senator Michael D’Arcy

—–Anglo 30%.”

528

Mr. Michael Buckley

Sorry. I misunderstood you. It’s a document written in 2009 looking back over the whole period from 2001 to 2009. I mean the page you are refer to says reported EPS growth in AIB, in 2003, 3%, and EPS growth forecast 2004, 6%. They are small numbers particularly relative to those produced by the bank that is lined up underneath the AIB numbers.

529

Senator Michael D’Arcy

Can I ask Mr. Buckley … you say that …

530

(Interruptions).

Senator Michael D’Arcy

You say that you didn’t think the bank took on too much risk in your period as CEO. Was there any reckless lending occurring? And was that reckless lending rewarded by AIB?

531

Chairman

Reckless is leading now. You can ask as to the quality and the—–

532

Senator Michael D’Arcy

But can I qualify last weeks—–

533

Chairman

Yes, please.

534

Senator Michael D’Arcy

Mr. Donal Forde who was head of retail did say that there was reckless lending.

535

Mr. Michael Buckley

But he did not say that there was—–

536

Chairman

Sorry, unless you are using a quotation from somebody, Senator, I need you to pull up the document and say that is somebody saying that like, you know.

537

Senator Michael D’Arcy

I did say that, Chairman.

538

Chairman

Yes but we reference it and produce it.

539

Senator Michael D’Arcy

I don’t have the reference in front of me.

540

Mr. Michael Buckley

First of all, I did watch his testimony. I don’t think he used the phrase “reckless lending”, but that’s a matter of record. The second … what I would say is that … looking at this from my point of view, for that period that I am talking about – I had absolutely no evidence, nor is there evidence in any of the core documents that I have got and received, that there was reckless lending or anything that could be described as reckless lending during those years, 2001 to 2005. That’s a categorical answer, no evidence whatsoever.

541

Senator Michael D’Arcy

Just to finish off, Chairman. Are you satisfied, Mr. Buckley, that AIB was properly ran during your tenure as CEO?

542

Mr. Michael Buckley

It was run to the very best of my ability and my colleagues. That’s not to say that there weren’t issues and I have talked about them when asked during the morning, and we did our best at all times to fix any issues that arose at the time and to do it a very open and transparent wayvis-à-vis our customers and vis-à-vis our regulators. So, there were issues. There were not issues relevant, I think, to the core of what this committee is enquiring about and we did our best to fix them. And there was no evidence, is no evidence, in any of the books I’ve got that there was reckless lending, or anything that could be approaching reckless lending, in my time as CEO.

543

Deputy Eoghan Murphy

Thank you, Chairman. Thank you to both the witnesses. Mr. Buckley, if I may I wanted to talk to you about the new accounting standard, IAS 39, that was introduced in January 2005. Mr. Forde told us that he had a view at the time that this new accounting standard wasn’t an appropriate formula. Did you hold that view?

544

Mr. Michael Buckley

I did, and I’d say 99% of people in the banking industry held the view as well, the same view.

545

Deputy Eoghan Murphy

Was this discussed with management in the bank and with the board at the time in AIB?

546

Mr. Michael Buckley

It was very definitely discussed with … amongst senior management. It was discussed with the auditors, in my time. And I can’t refer you to a board minute where it was discussed but I would be morally certain it was discussed with the board. It would have come up as part of our views about why we had to implement this particular regulatory requirement, etc., and the difficulties it would cause us.

547

Deputy Eoghan Murphy

And did you discuss this then with other banks as well? I mean, was this discussion happening in the banking system as far as you were aware?

548

Mr. Michael Buckley

I think it was happening very actively in the banking system for the simple reason … would you like me to tell you why? Would it help if I were to tell you why it was discussed so actively?

549

Deputy Eoghan Murphy

If you could, yes.

550

Mr. Michael Buckley

Well, traditionally in banking, you know, people working in banks know that there are good times and bad times, and that there are cycles, that there are lending cycles. And the old way of dealing with all of this was in the good times, you put aside money for the bad times. And what this was doing, essentially, this new accounting standard was saying, “No, you can’t put away money in the good times to help you deal with the bad times”.

551

Deputy Eoghan Murphy

Thank you. We have had evidence in relation to cross-cyclical provisioning. I’m sorry, I wasn’t sure what you wanted to discuss. Were you aware that the Spanish banks at the time were not implementing this new accounting standard?

552

Mr. Michael Buckley

I was and that was because the regulator had somehow been able to take a view, which somehow we – it would seem our regulator couldn’t – that irrespective of that accounting standard which was coming in 2005, that they would put additional provision and requirements on the banks. My view would have been, you know, if that could happen here .. but we were told – I can’t remember why – we were told it couldn’t happen here.

553

Deputy Eoghan Murphy

So you communicated this to the Financial Regulator?

554

Mr. Michael Buckley

Yes, it would have been in discussion … yes, it would have come up in discussions with auditors and with the regulator, yes.

555

Deputy Eoghan Murphy

And, sorry, the nature of that communication … would it have been a formal communiqué from the bank? Would it have been in a meeting—–

556

Mr. Michael Buckley

I can’t remember, this was … this was … I can’t remember, Deputy, to be honest, in what form. I would say it came up regularly over all of my period as CEO because this was something coming down the tracks at us in 2005 that we were having to prepare for.

557

Deputy Eoghan Murphy

And, Mr. Sheehy, in your period then?

558

Mr. Eugene Sheehy

Yes and I’ve two views on it. I was on the board of a US bank at the time and they decided to ignore it and the regulator over there said, “You’re supposed to do it, but in actual fact you can ignore it” and that’s what happened over in America. Here, when like … I agree with everything Mr. Buckley said, it’s a totally nonsensical accounting standard from a banking point of view. It may be appropriate for other industries but for banking it was totally nonsensical. There was a board discussion during my period there. I haven’t seen it noted but I did talk to an official in the bank who would have been an executive director at the time and we did discuss it. And we discussed whether we should go to the regulator with our concerns and given that no European country other than Spain had deviated from it, we decided there was no point. Now, I then tried to research what had happened in Spain and why it happened in Spain and there is a very particular reason. For historical reasons, Spanish banks were required to hold very large shareholdings in large Spanish companies. When their tier 1 was being calculated, the equity value of those holdings, which are basically stocks and shares, were included in their total capital. That didn’t meet the international standard for tier 1 because of its volatility so the Spanish authorities were able to make the case that, “We have this historical volatile piece of capital in our banks balance sheets – we need the extra comfort of not changing”, in effect and having cross cyclical provisions to bolster their resilience.

559

Deputy Eoghan Murphy

Sorry, just to clarify, Mr. Sheehy. Did AIB go to the regulator or not?

560

Mr. Eugene Sheehy

No.

561

Deputy Eoghan Murphy

No, AIB did not go to the regulator?

562

Mr. Eugene Sheehy

No, I don’t recall it, no.

563

Deputy Eoghan Murphy

Mr. Buckley, do you recall expressing these concerns to the regulator?

564

Mr. Michael Buckley

I don’t recall any approach made to the regulator formally in the case … in the form of a letter or a paper or whatever. I mean, a lot of these discussions we would have had with the auditor, you know.

565

Deputy Eoghan Murphy

But given maybe the level of concern that you expressed just previously. Banking institutions were talking about this, you were talking about it, the bank … why wouldn’t you express it formally to the regulator if it was a nonsensical standard?

566

Mr. Michael Buckley

Because the regulator knew already that that was the case. I mean it was in the ether, you know, in every country really. It was an issue.

567

Deputy Eoghan Murphy

You knew that the regulator knew that this was an accounting standard that the banks had a problem with?

568

Mr. Michael Buckley

Yes, I am absolutely confident that the regulator knew that it was an accounting standard that the banks everywhere were unhappy with.

569

Deputy Eoghan Murphy

Okay, thank you. I will move on then please, Mr. Sheehy, in relation to NAMA’s evidence to us last week. They gave us evidence on the extent to which banks were tending to collect income that was going to the debtors and not to the bank once the crisis began – about rental income from office blocks, from shopping centres – and this was in the millions. They gave us two figures. They said that 20% of income from investment assets were being mandated to the banks but 80% of income was being diverted away. And NAMA said that nobody seemed to be following up on it. NAMA then went after this income themselves. Is it the case in AIB that no-one was following up on this income?

570

Mr. Eugene Sheehy

Well, I was long gone before any assets were transferred to NAMA so I really can’t answer it, so I don’t know. I accept the evidence obviously, if that’s what they say, but I wasn’t there.

571

Deputy Eoghan Murphy

So you can’t have a view on it.

572

Mr. Eugene Sheehy

Well, you know, everything should have gone to the right place, you know … I don’t know because I wasn’t there.

573

Deputy Eoghan Murphy

In relation to relationships then, you mentioned earlier that your own relationships with, say, large developers, people taking large loans, that you had none yourself. So those loans would be made by people underneath you?

574

Mr. Eugene Sheehy

Correct, yes.

575

Deputy Eoghan Murphy

And how did you keep track of how those relationships were developed, how they began, how they were managed?

576

Mr. Eugene Sheehy

Well, these relationships … in AIB, almost all of our relationships were historically based, you know – we didn’t go out looking for new relationships. So these were customers that had been with the bank for a long time. So those relationships were managed and evolved over time. Customers got loans, they paid them back, more loans, they paid them back. So there was a confidence level there. There was a constant change in personnel at the bank. We changed the way these relationships were managed by centralising the management of these sector teams, moving it away from the front line. There is always … the nearer the banker is to the customer, the greater the risk. That’s just a golden rule in banking, okay. So you try to set up structures, processes, reviews and procedures that interject between that risk.

577

Deputy Eoghan Murphy

What does it tell us about the impairment on the loans that were transferred to NAMA … that the greater impairments were on the lower level of loans, the lower in terms of value?

578

Mr. Eugene Sheehy

I was surprised when I saw that in the comptroller’s report. I don’t know of the cases but it didn’t … it may stand to reason when you look back at it, the bigger the operator, the more likely they were to have non-Irish assets in their portfolio. That would be one definite fact. The bigger the portfolio, the more likely you would have a good chunk of investment property pre-let. So the most problematic asset was residential development land. So the bigger you were, the smaller the proportion that is likely to be in the portfolio. So I think that’s probably the cause of that.

579

Deputy Eoghan Murphy

My final question, and again it’s relating to Mr. Forde’s appearance before us. Mr. Gleeson said that the Republic of Ireland division brought the bank down. They are his words. And you were chief executive of the group at the time. Mr. Forde told us that in January-February ‘09, he was completely removed from discussions at executive management level and board level and then, without objectives or direction in terms of a work agenda in his new position, nine months later he then left the bank. What happened there?

580

Mr. Eugene Sheehy

Mr. Forde reported to me and I decided, and I communicated with him in … you know, it was a difficult communication. I have had, and I still have, great respect for him and all his professional abilities. I felt it was time for change in the ROI division. We needed to totally reorganise the amount of resources we were going to deploy around the problem and I had to change some personnel. My plan was that I would give Donal a strategic role, because we had so many strategic issues in front of us, and I had such regard for his abilities in that area – he was head of strategy before – that I was confident he could do a great job for us there. However, at that time, I was tasked with so many changing agenda items that I never really got round to give him the direction and accountabilities that I should have had.

581

Deputy Eoghan Murphy

And was anyone else redeployed at that time?

582

Mr. Eugene Sheehy

There were a huge number of redeployments. I mean, basically—–

583

Deputy Eoghan Murphy

At management level?

584

Mr. Eugene Sheehy

At management level, yes. I mean, there was hundreds of people pulled in out of the business to get onto the cases, particularly trying to get the data right, trying to get the accounts reviewed. Accounts are normally reviewed, by arrangement, quarterly or half-yearly or annually. We now had to try to review everything ASAP. So there was a … almost every aspect of the way the bank did its business was changed in those months.

585

Deputy Eoghan Murphy

Thank you.

586

Chairman

Mr. Sheehy there, Deputy Murphy had raised the NAMA loan book with you. Could I maybe ask you, just to round that off, in relation to the loans acquired from AIB by NAMA, the overall discount rate amounted to 56% eventually. Would you like to comment upon that discount and do you think it was a high or low figure? Was the 56% haircut that was applied justified?

587

Mr. Eugene Sheehy

There were no loans transferred when I was there because the process hadn’t started. Now, I was surprised at the level. I had been expecting, you know, from the … some statements by the Minister, and when you take into account the first loss position in all these loans was what the customer input was and then there was the bank’s LTV … basically the bank’s LTV, and then there was going to be another drop after that, and I honestly thought when I was leaving that the number was going to be 30%, that range. So I was surprised when I saw it. However, I don’t know exactly what the process was. The market absolutely collapsed at that point. There was no market. And you could actually, technically, make the point: why had they any value at all? There was no market. You know, if you used IFRS 39 it must have been very difficult to arrive at a number. So I was surprised but the market was so bad, I suppose, nothing will surprise me.

588

Chairman

Okay. Thank you. Deputy Pearse Doherty. Deputy, ten minutes.

589

Deputy Pearse Doherty

Go raibh maith agat, a Chathaoirligh, agus cuirim fáilte roimh an bheirt chuig an coiste fiosrúcháin. Can I just ask you, to start off with, Mr. Sheehy, to your knowledge, was there a practice of restructuring criticised loans, you know, for example, agreeing to moratoriums, interest-only, interest roll-up or extensions in the terms and conditions in the period of 2006 to 2008?

590

Mr. Eugene Sheehy

Restructuring loans, both criticised and uncriticised, is absolutely standard practice. A customer comes in, change of circumstances, “This is what I thought was going to happen; it’s not happening”, and the bank would look at it. Sometimes it would refuse the request; sometimes it would go along with it but it’s standard practice.

591

Deputy Pearse Doherty

That’s fair enough. In normal times it’s standard practice in banking to do this. In relation to that period, 2006 and 2008, did you see an increase of the type of restructuring in the way that I’ve outlined for large property … commercial property exposures?

592

Mr. Eugene Sheehy

Well, could I say, in normal times there are always customers in trouble. It doesn’t matter whether you have a global problem or not, but there definitely was an increase in 2008, I would say. There wasn’t any … not that I recall, any significant spike before then.

593

Deputy Pearse Doherty

And would this … by restructuring the loans, would this put these loans … would they move them from a category of criticised to uncriticised loans?

594

Mr. Eugene Sheehy

Well, when a loan is restructured or criticised, it’s almost always one event. Cash flow is not coming as expected. So that’s … so you’re dealing with a reality …

595

Deputy Pearse Doherty

That’s not the question. Which … by doing this, by rolling up interest, by restructuring them, does it move it from a category of criticised loan to a performing loan?

596

Mr. Eugene Sheehy

In general, it moves them into watch, vulnerable, or impaired. It moves them onto that path.

597

Deputy Pearse Doherty

But it moves them—–

598

Mr. Eugene Sheehy

But it may not … it may not always do so.

599

Deputy Pearse Doherty

But it moves them out of criticised.

600

Mr. Eugene Sheehy

Yes.

601

Deputy Pearse Doherty

Yes. Okay. In—–

602

Mr. Eugene Sheehy

Not always, but generally, yes.

603

Deputy Pearse Doherty

Okay. In relation to the position of your bank in the run up to September … or during September 2008, the liquidity pressures that institutions were facing, but in particular AIB … did the liquidity pressure for AIB ease during the second part of September 2008 or did it further tighten?

604

Mr. Eugene Sheehy

From 15 September onwards, i.e. the Lehman bankruptcy, everything got worse. Prior to that I would say, you know, the market was tightening but it was … we were able to get, you know, adequate funding and we had a good … as I say, we always had a good piece of leeway in front of us because you know the liquidity hurdles that we … there was two regulatory hurdles. We were comfortable there.

605

Deputy Pearse Doherty

But from the 15th, liquidity starting to tighten. Is that your evidence?

606

Mr. Eugene Sheehy

From the 15th, the world financial system was different.

607

Deputy Pearse Doherty

Okay. The reason I ask you that is … and I reference Vol. 2, AIB, C3b as core documents here, and we’re on page 50. In the minutes of the board meeting that was held in Baltimore, Maryland, USA, it’s reported … and you reported your interactions with the Central Bank and the Financial Regulator since 7 September. This meeting took place on the 17th, so two days after you report that liquidity pressures increased at that point. You say that there was a systemic need for term debt of up to €15 billion in the Irish market. You go on to say that AIB would breach its regulatory liquidity ratio by the end of October 2008 if market conditions did not ease and term funding became available. It goes on to say Central Bank has been informed of that. The chairperson goes on to indicate that in the absence of a response from the regulators to the systemic funding problem, the matter would be pursued at a political level. The reason I ask you this here is you’re making it clear in this board minutes that AIB would have a liquidity problem at October if circumstances didn’t change or pressures didn’t ease. You’ve confirmed to the committee that pressures not only didn’t easy but actually tightened. So was it the case that AIB was running into a severe liquidity problem?

608

Mr. Eugene Sheehy

We were in better shape than most. Now, when I say … when you say October, as I said earlier on, we have the liquidity requirements, the regulatory requirements, and you always have a date which is point in time versus the end date, and that assumes nothing happens in the meantime. There was always going to be funding in the meantime so that date would keep on moving out, but there were real concerns after Lehman’s that even offering better prices on term debt would have no effect because people were running to avoid risk everywhere. So we didn’t know what was going to happen. The term debt of €15 billion was the kind of money that would be rolling over, kind of three and six month money that would be rolling over, and if that didn’t materialise or roll up, it would have had to be replaced somewhere else.

609

Deputy Pearse Doherty

The point I’m making is, the minutes reflect, is that if pressures … liquidity pressures didn’t ease, you would breach liquidity ratios by the end of October.

610

Mr. Eugene Sheehy

If we got no more money.

611

Deputy Pearse Doherty

Yes, if they didn’t ease. You have informed the committee that liquidity pressures didn’t ease, indeed what happened after this meeting is they tightened. So the question I put to you is, was AIB facing a seriously liquidity problem in October or after that point?

612

Mr. Eugene Sheehy

I believe we were facing a manageable liquidity problem. We had, you have to think of the way our funding was made up, I mean we … half of our resources were in retail deposits. We were very stable there. And we also had a huge amount of assets that we could turn into self-funding assets. So we would have had to change things to be better equipped, but we could have done it.

613

Deputy Pearse Doherty

But you also say in these notes that this matter would be pursued at a political level. This is how serious the matter obviously was being reflected at the board meeting.

614

Mr. Eugene Sheehy

I thought that … I think it would be irresponsible if our bank of our…if an institution of our size and importance in the economy didn’t give a very honest appraisal.

615

Deputy Pearse Doherty

Okay, so two weeks later you had, or within two weeks you had the meeting with the Taoiseach and the finance Minister looking for a guarantee for your bank and three others.

616

Mr. Eugene Sheehy

Yes.

617

Deputy Pearse Doherty

Okay, the notes … the memo that you took on 2 October, is there any reason for this committee not to judge them as true and accurate reflections of what happened on those nights?

618

Mr. Eugene Sheehy

That is what I wrote a couple of days later.

619

Deputy Pearse Doherty

So you don’t dispute anything in the memo.

620

Mr. Eugene Sheehy

No.

621

Deputy Pearse Doherty

You may not remember or recall certain events but the memo is correct.

622

Mr. Eugene Sheehy

It is six and a half years ago. I wrote that two days later. It is as close as I can get to recall.

623

Deputy Pearse Doherty

So can I … can I ask you a question in relation to the memo that you took? First of all you say, and this is the same book, page 37, “The Government submitted a form of guarantee, copy attached.”

624

Mr. Eugene Sheehy

Yes.

625

Deputy Pearse Doherty

Do you have the copy of the form of guarantee that the Government submitted?

626

Mr. Eugene Sheehy

I don’t.

627

Deputy Pearse Doherty

What did you do with it?

628

Mr. Eugene Sheehy

Well I obviously must have had something when I wrote the minute.

629

Deputy Pearse Doherty

Yes.

630

Mr. Eugene Sheehy

If I said copy attached. When I read that I think, maybe that was what the Government actually announced the next day.

631

Deputy Pearse Doherty

No, it’s just … let me maybe clarify this here.	632
The Government submitted a form of guarantee, copy attached, which in our view, while inspirational in terms, is not what we were all looking for and fell short of lack of specificity. We had drawn up an alternative which included language that was more specific.	633
So it is very clear from this memo that you took a number of days afterwards that this is not the guarantee that was announced.	634

Mr. Eugene Sheehy

Yes, it reads like that, but look, I don’t have a copy of what it was. I couldn’t find it, the bank couldn’t find it in its records. And perhaps the Department of Finance have a copy of it.

635

Deputy Pearse Doherty

So the memo that you took, did you just keep it for yourself personally? Or did you give it to AIB or—–

636

Mr. Eugene Sheehy

Oh no, that’s … that’s a bank document.

637

Deputy Pearse Doherty

Okay, so it’s clear from this memo that there was a copy of the draft guarantee attached.

638

Mr. Eugene Sheehy

That’s what I said.

639

Deputy Pearse Doherty

And that’s not … that’s just not to be found at this point in time to your knowledge?

640

Mr. Eugene Sheehy

Correct.

641

Deputy Pearse Doherty

Okay.

642

Mr. Eugene Sheehy

But I … and I don’t recall what it was either.

643

Deputy Pearse Doherty

Okay and we had drawn up an alternative form, and again the alternative form is not available to anybody at this point in time either.

644

Mr. Eugene Sheehy

Unfortunately, no.

645

Deputy Pearse Doherty

And in relation to the point where, I think it was the fourth interaction, which was the bilaterals, you say that:	646
there were also issues in the Government’s draft which we were uneasy about relating to the attestations by the Financial Regulator that the system was solvent and that all banks were solvent. We felt that there was clearly a risk in this statement. Subsequently the Government deleted this reference.	647
So did you see a piece of paper that included a reference, in the Government’s guarantee, saying that the banks were solvent?	648

Mr. Eugene Sheehy

I think it was only verbal.

649

Deputy Pearse Doherty

Verbal?

650

Mr. Eugene Sheehy

I don’t remember reading anything … I don’t remember a document being on the table.

651

Deputy Pearse Doherty

Okay.

652

Mr. Eugene Sheehy

And the reason … the reason, there was a very specific reason why, I can speak for myself, I was against including that, was that, you know, in market communications you have to be very specific about what you are communicating. This was a liquidity guarantee, it didn’t, the solvency issue wasn’t relevant as far as I could see—–

653

Deputy Pearse Doherty

Yes that’s quite interesting, because you say it now, and I’ll point out the point that you say that it was the Government’s draft that you were uneasy with and not verbal communication but that has just been noted. You say … you give a reason why you were uneasy with the statement of solvency and you said that “if market participants purchased shares in companies, once the guarantee was issued and it subsequently transpired that these companies were not as strong as contended”. Why would you be concerned about these companies not being as strong as contended?

654

Mr. Eugene Sheehy

Well Deputy, I used to spend hundreds of hours every year going over form 20Fs, thousands of pages of communications to the market. And there is a discipline about communicating to the market. You communicate exactly what is factually being dealt with. This is—–

655

Deputy Pearse Doherty

Did you believe it was un-factual to say that these were—–

656

Chairman

Just let him respond, Pearse, I’ll bring you back in again.

657

Mr. Eugene Sheehy

It was speculative, you know … I mean to say something that wasn’t related to the communication the Government was making, wasn’t necessary.

658

Deputy Pearse Doherty

But Mr. Sheehy … Mr. Sheehy, when you left that meeting, and correct me if I am wrong, but from the evidence we have heard, when you left that meeting and when you asked for the insolvent … the statement of solvency of the institutions to be deleted, that you believed that you were only referring to four institutions that were going to be guaranteed by the Government. And the question I have to ask you again is, did you have suspicions that any one of the four … because you only believed that the four were going to be guaranteed, but you asked them not to make a statement saying that those four were solvent. Did you have any concern in relation to any of the four institutions that you thought were going to be guaranteed by the Government on that night?

659

Mr. Eugene Sheehy

In the discussion, we said that this is an unnecessary addendum to a bank guarantee statement. And is unnecessary. And I expressed a view, one of the views, I don’t know if I expressed that view at the meeting, but maybe I did. But it was unnecessary.

660

Deputy Pearse Doherty

You say in this memo again—–

661

Chairman

You are running out of time, Deputy, so I need your final, final question so I can close now.

662

Deputy Pearse Doherty

I’ll finish now. You say that the reason that you wanted this deleted was that, if company … participants purchased shares in companies, once the guarantee was issued and it subsequently transpired that these companies were not as strong as contended.

663

Chairman

Final question, final response Mr. Sheehy.

664

Deputy Pearse Doherty

Now we heard evidence last week—–

665

Chairman

Deputy.

666

Deputy Pearse Doherty

That this was in relation to Anglo and Nationwide. But I put it to you, that you left that meeting believing that Anglo and Nationwide was not going to be guaranteed, so that statement couldn’t have referred to those two institutions.

667

Chairman

Okay, thank you. Final question, final response. I need to move on.

668

Mr. Eugene Sheehy

Yes and it was unnecessary to have a solvency statement in a bank guarantee statement.

669

Chairman

Can you just clarify … just this single point for me. Did AIB have to be guaranteed? Forget about other banks’ behaviours, other banks’ balance sheets, other banks’ position on the night. Did AIB require a guarantee that night?

670

Mr. Eugene Sheehy

Yes.

671

Chairman

Okay, thank you. Senator Marc MacSharry.

672

Senator Marc MacSharry

Thanks very much. During your tenure as CEO, Mr. Sheehy, how much time would the board have allocated to strategy and business model development and its monitoring, as opposed to other work?

673

Mr. Eugene Sheehy

The board schedule, obviously there was a monthly schedule and a lot of the time in the monthly schedules was taken up with kind of business reviews and updates and scheduled items that would be there for some time. And then every … every year we had a strategy session, which was normally an off-site, two-day session where we would look at what the issues were for the business going forward.

674

Senator Marc MacSharry

And at no time was it identified, say going back to the Jim O’Leary issue mentioned earlier, to say that look we are over-focusing. You yourself earlier said that you were happy enough up to early 2008. Were there anybody around the table during the period that said “Look”?

675

Mr. Eugene Sheehy

Actually one of the off-sites … one of the strategic meetings we had, I think it was up in north County Dublin, we had Professor Ahearne and Dr. FitzGerald, and that was specifically an off-site about what’s the shape of the Irish economy, how does it relate to property and values. So very specifically, some of the strategic thinking and board input would have been around the whole future of this stage.

676

Senator Marc MacSharry

And following that then, was there any specific actions taken to cool the AIB pursuit of more enthusiastic lenders, let’s say?

677

Mr. Eugene Sheehy

We definitely … we definitely were quite cool on the mortgage market in terms of the amount … the amount of people who could borrow … that could borrow from us and the way we used our debt service calculator. So that remained cool, we were cool on intermediary-driven business. On the other … on the other side, the commercial and residential property development, we were applying the stress tests and the Basel model, which we thought mitigated the risk.

678

Senator Marc MacSharry

But didn’t, as we know. Can I ask … you mentioned that you were a branch manager for a period of years in your career. Can I ask, would you have had targets for lending when you were a branch manager?

679

Mr. Eugene Sheehy

Yes, so I was a branch manager for ten years between, kind of, early 80s to ‘93. Mostly in Dublin branches quite … quite large. There was targets.

680

Senator Marc MacSharry

I get the picture, so there was targets?

681

Mr. Eugene Sheehy

Yes there was targets.

682

Senator Marc MacSharry

Would your remuneration be reflected by your performance versus those targets?

683

Mr. Eugene Sheehy

In those days, there was virtually no bonuses.

684

Senator Marc MacSharry

Okay, so as CEO, would branch managers have lending targets?

685

Mr. Eugene Sheehy

Yes. Can I give you a top-down—–

686

Senator Marc MacSharry

No, it’s okay, I just need yeses and nos. It is a very specific line of questioning.

687

Mr. Eugene Sheehy

The answer is “No”. They had targets on three levels and it was called the people performance index. They had to have a profit outcome, they had to have a people index outcome which was a stat survey, and they had to have a customer service outcome, which was a customer service initial shopping survey. I introduced that process in late 2001 in conjunction with HR to actually deal with the issue of a more holistic approach to management in branches.

688

Senator Marc MacSharry

In reality, and I appreciate that there was this approach, were there targets given to branch managers which manifested themselves in volumes of money lent?

689

Mr. Eugene Sheehy

Branch managers had no sanction; they couldn’t lend. Lending was centralised and credit scored. They could introduce and try to capture the opportunities they found in their franchise. That was their job, but they didn’t make the decision

690

Senator Marc MacSharry

I didn’t say they did and the question is not in relation to underwriting. The question is relating to … are there volume targets?.

691

Mr. Eugene Sheehy

They had no control over the outcome —–

692

Senator Marc MacSharry

No, are there volume targets specific to lending for branch managers?

693

Mr. Eugene Sheehy

No.

694

Senator Marc MacSharry

So how do you measure the performance of a branch?

695

Mr. Eugene Sheehy

You measure it three ways … the profit—–

696

Senator Marc MacSharry

You mentioned the model there that you had … What I’m trying to say—–

697

Mr. Eugene Sheehy

But the bonus was linked to those three measures and they were mechanised and scored—–

698

Senator Marc MacSharry

So let’s say you lent nothing and you took on no investment in increased deposits, how could you reach your target? Was it possible to reach your target by lending less and accepting less deposits? So, say, I’m the branch manager and my branch had a run and I lent nothing. Could I reach my target?

699

Mr. Eugene Sheehy

Yes … you would then not be able to trigger an element of your reward.

700

Senator Marc MacSharry

Okay, so is it reasonable or not to assume that in order for me as a branch manager to reach my targets that, I along with other issues, would have to increase deposits and increase lending? Yes or no?

701

Chairman

He can answer any way he wants.

702

Senator Marc MacSharry

I have asked my question and I have asked that it be answered in a certain way. And no doubt he’ll respond without your help.

703

Mr. Eugene Sheehy

If I’m a branch manager, and as I can’t sanction loans, that is a factor that is beyond my control so I have to grow the business through a whole myriad of revenue lines. Lending is one of them and the only function I play in lending is bringing that proposition to the decision makers elsewhere.

704

Senator Marc MacSharry

Would branch managers be expected to cross sell the products of the branch … of the bank?

705

Mr. Eugene Sheehy

Absolutely.

706

Senator Marc MacSharry

And would they be volume-related or would it be —–

707

Mr. Eugene Sheehy

Well, there is a very strict code on selling and you can’t sell products on volume it has to be on the suitability of the client’s needs and that’s a documented, regulated process

708

Senator Marc MacSharry

Would you accept or not that in order for branch staff to reach their targets that they would focus on increasing the volumes of sales of bank products, including loans?

709

Mr. Eugene Sheehy

They would generally try to drive the revenue in their business through all the different lines of business available—–

710

Senator Marc MacSharry

Including increased lending.

711

Mr. Eugene Sheehy

They had no control over that but, yes—–

712

Senator Marc MacSharry

No, they had no control over underwriting, but in terms of numbers of applications—–

713

Mr. Eugene Sheehy

Numbers of applications, yes.

714

Senator Marc MacSharry

Okay, so would it be possible, therefore, that an unintended consequence of the targeting approach of the bank may have led to a volume of applications of a lesser quality? Would it be or not?

715

Mr. Eugene Sheehy

Because of the way we centralised the management of these relationships, the branches were, by and large, divorced from the volume business.

716

Senator Marc MacSharry

Okay, I have to move on as I have 2.4 minutes left, not including the leniency that you gave Mr. Doherty there … so whatever I get for that.	717
In terms of the interaction with the regulator and the loan-to-values, Mr. Buckley you mentioned earlier on, and I’m quoting, “applicants who are in a special place” … for example ,you said they may have got help from family and so on, so were there any developers or commercial customers that were ever in a special place, to use your own word?	718

Mr. Michael Buckley

Well … let me … No, to my knowledge in my time is my answer.

719

Senator Marc MacSharry

And Mr. Sheehy in your time? Were there any applicants of a commercial nature that were in a special place to use your predecessor’s —–

720

Mr. Eugene Sheehy

No.

721

Senator Marc MacSharry

No. So when Mr. Gleeson last week mentioned that on one occasion the board increased lending, say, and these were his figures, by €200 million from a €700 million position, would that person have been at a special place?

722

Chairman

Can you just refer to the transcript there if you are using that, Senator MacSharry?

723

Senator Marc MacSharry

I don’t have the exact page but it’s there.

724

Mr. Eugene Sheehy

The case you’re referring to was a board decision with a 64 page mark-up accompanied by professional evaluations and net worth statement of €3 billion net of debt. The special place, the name of the individual was irrelevant. It was a financial transaction that was examined forensically as to whether it was a good risk or reward proposition for the bank.

725

Senator Marc MacSharry

And there was an established process that one would follow in those instances, would there be?

726

Mr. Eugene Sheehy

Yes.

727

Chairman

I will give the Senator a bit of time because Mr. Buckley is indicating —–

728

Mr. Michael Buckley

Just on a point of clarification because I may not have been 100% clear … the phrase you used about ,”in a special place”, could be misinterpreted maybe.. What I was referring to is that in response to a general request from the regulator to all banks to review their lending policies in relation to mortgages, one of the things that came up before the AIB board, and which was reported back to the regulator, was that we have a particular approach which we applied to the generality of people looking for mortgages, and that includes certain formulae to do with loan-to-value ratio and repayment capacity. What we do then is that in certain cases where we believe, and we’re talking about categories rather than individuals, in certain cases where we believe that people’s repayment capacity will grow quite rapidly in the future or where they have family support, we are prepared to go to a higher LTV then we generally would, that’s what I said. So it wasn’t about special cases; it was about categories.

729

Senator Marc MacSharry

I get the point, thanks very much. Right, just three very quick questions, Chairman. First of all, last week Mr. Gleeson again referred to a private conversation with Mr. Lenihan in which he was given the clear understanding, he said, that Mr. Lenihan was of the view that Irish Nationwide and Anglo should be nationalised. Did you ever have – and this is to Mr. Sheehy – any personal conversations or telephone calls with either Mr. Lenihan or Mr. Cowen?

730

Mr. Eugene Sheehy

Only meetings when there was officials present, no private.

731

Senator Marc MacSharry

And was that view expressed?

732

Mr. Eugene Sheehy

The only time it was expressed, it was expressed by me on the night saying that they should be nationalised.

733

Senator Marc MacSharry

And was there agreement or no response?

734

Mr. Eugene Sheehy

We weren’t the decision-makers; we were dismissed after that.

735

Senator Marc MacSharry

Okay, before you were dismissed were you given a clear impression or anything like that?

736

Mr. Eugene Sheehy

No, they were listening.

737

Senator Marc MacSharry

But you were shocked the next day? Yes or no?

738

Mr. Eugene Sheehy

That’s correct. That’s what I said.

739

Chairman

Next question, Senator—–

740

Senator Marc MacSharry

I’m nearly there … Also last week, Mr. Gleeson made reference to article 14.3 in his opening statement of the ECB statute which says that they can intervene with central banks effectively and direct them how to act, and he seemed to think that interest rates should have been using the Taylor rule between 6% and 12% during the boom years. Have you a view on whether the ECB should have intervened? What should they have done if you do have that view? And, very finally, tomorrow we have the opportunity to speak with Mr. Trichet, the then head of the ECB, and I’d be very interested to know any recommendations you might have about what we might ask him?

741

Mr. Eugene Sheehy

The Taylor rule is a rule that often comes up when people are looking back and saying, “Oh, it would have been good if we had the Taylor rule”. Ireland at that time was trying to promote itself, including the Irish Financial Services Centre, as a place to do business that was mainstream European and compliant with all the international standards of Basel, IFRS and everything else. I think it would have been difficult, very difficult for the Irish authorities to carve out a special case while wanting to drive in a general direction of being really pro-central European. I don’t know what you would ask Mr. Trichet.

742

Senator Marc MacSharry

ECB. It is not that the Irish authorities—–

743

Chairman

Do you have a question?

744

Senator Marc MacSharry

We know what we did, and could have done, and did not do. What I am asking is, your then chairman had a very specific view, which he articulated last week, that the ECB had authority to direct the Central Bank to act in particular ways to, as he put it, mitigate against the unsustainable nature of low interest rates. I think I am quoting precisely so I am interested in your view on that.

745

Chairman

Okay Senator, can we get the answer because I need to move on? Mr. Sheehy, if you do have an answer that is.

746

Mr. Eugene Sheehy

If the national Central Bank … of the Central Bank tried to increase interest rates here to forestall strategic problems that could have happened in the future, I do not think they would have got much public support.

747

Chairman

Thank you very much. Deputy McGrath please.

748

Deputy Michael McGrath

Thank you very much Chair. I would like to welcome Mr. Sheehy and Mr. Buckley. Mr. Sheehy, you passed a comment earlier on that the guarantee did not cost anything. That would be quite different to the commonly-held view about the guarantee so can you just elaborate on what you mean by that?

749

Mr. Eugene Sheehy

The question was in relation to AIB. The guarantee of the depositors and the bondholders in AIB did not have a direct cost. The cost to the State from AIB was when the assets were transferred. They were less than the value that we thought they were. But the funding of the bank during the tenure of the guarantee was paid for out of the charge that was ordained by the ECB.

750

Deputy Michael McGrath

Had you any bonds that matured during the two years in question?

751

Mr. Eugene Sheehy

No. The earliest one was 2013.

752

Deputy Michael McGrath

Did AIB have senior debt?

753

Mr. Eugene Sheehy

We had nothing maturing. Senior debt is perpetual so it never matured unless you decided to call upon it. Obviously you would not call upon it during the tenure of the guarantee. There was substantial equity created obviously when the bank put those debt instruments back to investors in offer for other ones, I think over €3 billion of equity created in the AIB book and €15.9 billion in the State overall, in burning the bondholders if you want to use that phrase.

754

Deputy Michael McGrath

You said in response to the Chairman that AIB did need a guarantee at the end of September 2008, so by extension would the bank not have survived if there had not been a guarantee intervention?

755

Mr. Eugene Sheehy

I do not think any Irish bank would have survived if there was not a guarantee. Including AIB.

756

Deputy Michael McGrath

How quickly would it have become fatal for AIB if there had not been a guarantee?

757

Mr. Eugene Sheehy

Well, we were still in reasonable position five or six weeks out and we had not used any of the other mitigants. For instance, we could have got all our mortgages and turned them into self-funding assets. We could have sold down our corporate loans, probably taken a loss on it. It is speculative to say how long. I would say months and months and maybe over a year. But I do not know, it would depend, it is pure conjecture.

758

Deputy Michael McGrath

I suppose what I am asking is, if the Government had sent you home that night and said, “Look, we are not getting involved, sort out your own problems”, what would the future have been for AIB and how quickly would matters have developed in your opinion?

759

Mr. Eugene Sheehy

On the liquidity side, I would say and it is pure guesswork, six months to 12 months period or something like that. But you would have a lot of opportunity to do different things during that time, which may or may not have worked. It is pure theory.

760

Deputy Michael McGrath

You have opened up a question mark there, so just to put the question again, would AIB have survived without a bank guarantee, in your view?

761

Mr. Eugene Sheehy

The bank could not have survived if it had no liquidity. That is the answer.

762

Deputy Michael McGrath

And the guarantee provided that liquidity.

763

Mr. Eugene Sheehy

I think the guarantee was critical in providing liquidity. There was always some liquidity but the guarantee was obviously critical.

764

Deputy Michael McGrath

Can I just ask about the issue of a four-bank guarantee, because your testimony and that of Mr. Gleeson is quite consistent on that issue? You had the clear impression that a four-bank guarantee was being considered, not a six-bank guarantee. On what basis did you have that impression? The only direct reference in the notes you took on the night is to Mr. Hurley, for example, saying it was impossible to bring down a bank of that size in the middle of the week and could lead to a fumble etc., which is the same word Mr. Gleeson used. So can you be specific? How did you have that clear impression that it was going to be four banks and not six?

765

Mr. Eugene Sheehy

Principally because we were asked to get €5 billion to Anglo because it could not meet its obligations. So there was no need to say it. That was over.

766

Deputy Michael McGrath

That was to get it to the weekend. That was your understanding.

767

Mr. Eugene Sheehy

Yes. My note, my note in the board meeting of the previous evening where I referenced a discussion with officials saying that a four-bank guarantee would be needed if the other two failed or did not get a white knight. So … it was just assumed really.

768

Deputy Michael McGrath

You say, again in the notes you took on that night, that you felt … the view that AIB took in relation to Anglo and presumably INBS was of being closed down, nationalised or put into some sort of run-off position and ring-fenced from the rest of the institutions. They are all very different things in some respects. What were you saying should have happened to Anglo and INBS in your view at that time?

769

Mr. Eugene Sheehy

Technically, it was totally beyond our experience and competence to even have an idea of what to do, to be quite honest. There was no statutory mechanism. Liquidating a bank is an entirely different process to liquidating other going concerns, because it is a public event. Quite honestly, we did not know what the best thing to do was. We just knew that if they could not fund their obligations the following morning, there was no way forward.

770

Deputy Michael McGrath

Even with the guarantee of your liabilities, could AIB have survived a disorderly wind up of Anglo? If Anglo had been allowed to collapse the following day and you had a Government guarantee for the four banks, how do you think that would have played out?

771

Mr. Eugene Sheehy

If we had the four-bank guarantee—–

772

Deputy Michael McGrath

But Anglo was allowed to fold.

773

Mr. Eugene Sheehy

There would have been … I have some notions of what might have happened. There would have been a credit downgrade of all Irish institutions. There would be a systemic mark on Ireland which would have made funding much more difficult immediately, even with a guarantee. There is no doubt about that in my view. But the market would, I think, then have said there is a problem in Ireland and they are addressing the core of it, there would have been a distinction made in due course. It may have taken a number of weeks for that distinction to be accepted by the market.

774

Deputy Michael McGrath

So the outcome in your view is unclear or not in that scenario?

775

Mr. Eugene Sheehy

I think we would have managed it with difficulty over a number of weeks. The guarantee would have kept the other four institutions funded.

776

Deputy Michael McGrath

Okay. Mr. Buckley, can I ask you what was your view on the earnings and EPS growth targets set by the board of AIB, given the maturity of the market? I refer to AIB B1, Vol. 1, pages 43-55, which is a board paper from a seminar. If you wish to comment on that issue – the earnings and the EPS growth targets that were set.

777

Mr. Michael Buckley

This is over the period, Deputy, to—–

778

Deputy Michael McGrath

Of your tenure, yes.

779

Mr. Michael Buckley

—–2005. I felt that – just to give an overall comment – I felt that achieving double digit growth was a realistic target, that it was stretching to some extent, but that it was realistic and if I may take that in the context of the Republic of Ireland division, I suppose to summarise the reason why I would have thought that there was good growth available in the Irish division. Twofold: one, the demographics that I referred to before. Second of all, a point I mentioned in my opening statement, that, while we had a big share of the current accounts of households and individuals and of the working accounts of companies and the strong position with the SMEs that, on a product-by-product basis, we actually had a much lower market share. So let’s say in mortgages, while we had 30% of all the current accounts in the country, we had 16% market share in mortgages. So, there was inherent growth potential and when we made an assessment of what would be the net result of doing better on that front, but also reorganising ourselves, for instance by centralising the way in which we dealt with producing mortgages and producing a better proposition, that we would get there. Double digit growth in the sense of 10% or 11% or 12% per annum, in the context of the economy we had, was not a wild or strange target to have would be my view, even still looking back at it now.

780

Deputy Michael McGrath

Mr. Sheehy, you made reference a few minutes ago to taking a voluntary reduction in your pension. Do you wish to reveal to the committee what your annual pension from AIB is?

781

Mr. Eugene Sheehy

It was public … there was a public statement on it. That’s on the record.

782

Deputy Michael McGrath

Okay. Do you wish to confirm the figure?

783

Mr. Eugene Sheehy

€250,000.

784

Deputy Michael McGrath

€250,000. And the amount of the voluntary reduction that you took? If you wish to reveal it.

785

Mr. Eugene Sheehy

I don’t wish to reveal it because it is subject to a non-disclosure with the trustees.

786

Deputy Michael McGrath

Okay. And you took a reduction from the level that … that you would’ve been contractually entitled to, is that the case?

787

Mr. Eugene Sheehy

Subject to a non-disclosure with the trustees at the pension fund who have separate duties … legal duties, so I have to honour it.

788

Deputy Michael McGrath

Okay.

789

Mr. Eugene Sheehy

I did make a … obviously, I did respond when the bank made a request—–

790

Deputy Michael McGrath

Sure.

791

Mr. Eugene Sheehy

—–quickly agreed to it, but you know that’s just one constraint—–

792

Deputy Michael McGrath

Sure. Mr. Buckley, do you wish to reveal your annual pension from AIB?

793

Mr. Michael Buckley

I’m in a similar position. I have a non-disclosure agreement with the pension fund but I did take a significant reduction in my pension … substantial reduction in my pension several years ago.

794

Deputy Michael McGrath

Okay.

795

Mr. Michael Buckley

And that continues to be the case.

796

Deputy Michael McGrath

And the non-disclosure requirement provides that you can’t disclose the amount of the reduction, is it? Or that you can’t disclose your—–

797

Mr. Michael Buckley

Well, there—–

798

Deputy Michael McGrath

—–pension?

799

Mr. Michael Buckley

——was a general … I … I’m trying to remember the precise terms of it, but the general tenor of the non-disclosure was that the pension and the amount of the reduction is a matter between me and the defined … the trustees of the defined pension scheme.

800

Deputy Michael McGrath

Thank you.

801

Chairman

Thank you very much Deputy. I just want to tidy up a few matters, I’ll bring in the two leads to conclude and then we’ll conclude. Just very specific to yourself, Mr. Sheehy, just your own description, as to how you would briefly characterise AIB’s relationship under your stewardship with the Financial Regulator in the period of 2003 and 2008?

802

Mr. Eugene Sheehy

2005 to 2008?

803

Chairman

Yes. 2003 to 2008.

804

Mr. Eugene Sheehy

Well I wasn’t there.

805

Chairman

Oh sorry.

806

Mr. Eugene Sheehy

Yes.

807

Chairman

Okay.

808

Mr. Eugene Sheehy

So, 2005 to 2008. Professional and robust in every way that I dealt with them. You know, I think they did as well as they could have. They were short of resources when the problems hit and that obviously affected the situation.

809

Chairman

All right, and just a … on to round off some stuff on the guarantee, a … you … AIB brought a formula of words of some description on that night, as Mr. Gleeson said last week. And it … this may have been covered already, but should sub-bondholders … should sub-bondholders have been asked to bail in, by your view?

810

Mr. Eugene Sheehy

Well I can only talk about AIB. There was no bond … no bond enhancement for the AIB bonds. And I don’t know how the … you know, what negotiations took place between Government and the EU … I have no idea. Mr. Trichet will—–

811

Chairman

And correct me if I am wrong here, by your own testimony today, you seem to have had the impression when you went home that evening, very late into the early hours of the morning, that the guarantee was going to be of one construction to be surprised the following morning to have been shaped in a different way. Do you have a current view as to the appropriateness of the guarantee and how it was put in place?

812

Mr. Eugene Sheehy

I don’t think it’s fair for me to have that … I mean, I have my notes, my recall and how I felt on the next day. I wasn’t in there when the decision makers were working on it. I don’t know who else was in there or what advice they got.

813

Chairman

A final issue. Earlier this morning, I think it was on the questioning engaged with myself, you said that AIB was, sort of, monitoring itself against Bank of Ireland than maybe Anglo Irish Bank or other monitors. That was the model space you saw yourself in, yes?

814

Mr. Eugene Sheehy

Traditionally, yes.

815

Chairman

Traditionally, okay. So, with reference to those earlier comments, can you maybe explain why AIB needed four times more taxpayers’ money than Bank of Ireland?

816

Mr. Eugene Sheehy

Because we were overweight in development land and I think that was connected to our heavier position in the customer base than Bank of Ireland in SME businesses and self-employed people, particularly outside Dublin.

817

Chairman

All right. I’m kind of moving into the conclusion here and I’ll conclude the final speakers if I can maybe get this covered. You mentioned Sarbanes-Oxley Act this morning, Mr. Buckley, that you were involved in that. Could you just explain to the committee what that actually is? That’s an American piece of legislation, that’s not an Irish—–

818

Mr. Michael Buckley

No, but it applied … it applied generally around the world and it is … was really about introducing the sort of huge piece of legislation of, I don’t know, 800 pages or something like that. But essentially, it introduced a whole lot of extremely detailed sign-off processes at all levels in a, for instance, a banking organisation, to get to the point where the board of directors would sign off the accounts to make as sure as possible that the accounts were representative of the state of the business. So it was a whole new panoply, if you like, of sign offs and cross sign offs, and all that sort of thing.

819

Chairman

Okay, as I understand it, and you … my interpret … because this came up in our engagement with Professor Black as well, is that the Sarbanes-Oxley Act, very much what it does, is it ties senior banking officials into signing off on the true and fair record—–

820

Mr. Michael Buckley

Yes.

821

Chairman

—–of the bank. Are there criminal sanctions, then, that arise out of that if … in that act, that are related to it?

822

Mr. Michael Buckley

I can’t … I can’t remember.

823

Chairman

Yes, sure.

824

Mr. Eugene Sheehy

Sarbanes-Oxley was a direct outcome of the Enron scandal.

825

Mr. Michael Buckley

That is correct.

826

Chairman

Yes.

827

Mr. Eugene Sheehy

It related entirely in substance, to malfeasance and misrepresentation at a very senior level in organisations about the state of the companies involved. The sign-offs were to link the leadership of a company to all the public information in that company. And, if there is a disconnect there or a misrepresentation or fraud, that is a legal … that’s a legal problem.

828

Chairman

Do you have a view in, sort of, robust legislation which kind of ties people tighter into the process that would have very, very strong sanctions being applied? Do you see a shortfall in the current situation there and in where something like this could be done?

829

Mr. Michael Buckley

I feel that that tie-in is very important, Chairman, and in fact, I think I’m right in saying that relatively recently, it has become much more explicit in the UK for financial services companies at least. But the answer to your question is, I do believe that the tighter it is, the better it is. Because the more review there will be at each level—–

830

Chairman

But specifically to Sarbanes-Oxley, that the senior banking officials would be tightened in more to the accounts that they are signing off on and that would require … that … resulting in, if it wasn’t done appropriately, would actually have very significant sanctions, would be your view.

831

Mr. Michael Buckley

I am saying that that is now in the UK, I think, much more explicitly as well, in financial services.

832

Chairman

Can we wrap up, Deputy O’Donnell? Five minutes.

833

Deputy Kieran O’Donnell

Thanks, Chairman. Just a very quick question, Mr. Buckley. The fact that your colleague, Mr. Sheehy, has disclosed what his pension is, would you be … feel that you might disclose what your pension is at the moment?

834

Mr. Michael Buckley

I honestly don’t feel any obligation to do so. I mean, the general terms of a pension that you get is public information in terms of percentage of salary.

835

Chairman

It has been answered. Five minutes, Deputy.

836

Deputy Kieran O’Donnell

Can I go back to Project Omega to Mr. Sheehy, about … Can you just explain the circumstances of Minister Lenihan’s approach to the bank, was there a meeting? Were you surprised with the approach in terms of asking that AIB would take over Anglo?

837

Mr. Eugene Sheehy

I can’t remember whether it was a meeting or a phone call. But it was a … there was a definite request to look at Anglo and see, could you take it over.

838

Deputy Kieran O’Donnell

Were you surprised?

839

Mr. Eugene Sheehy

At that time, I think, everybody was looking at every option because the situation was deteriorating rapidly. I knew immediately that it was a non-runner.

840

Deputy Kieran O’Donnell

Why?

841

Mr. Eugene Sheehy

Because we were fully tasked with managing our own affairs. We would have to do due diligence on the company. We didn’t have the time to do it.

842

Deputy Kieran O’Donnell

So were you in survival mode yourselves?

843

Mr. Eugene Sheehy

We were … we were not in survival mode. We were managing our assets as best we could and we were reviewing everything. The PwC report was in process at the time. But, like, it wasn’t even conceivable that we could take on another risk, for starters. We wouldn’t have had the people or the resources to do due diligence on a bank like that, would take, I don’t know—–

844

Deputy Kieran O’Donnell

And two quick questions. What was the reason that Minister Lenihan gave that he wished for you take over Anglo and what was his response when you said you were not willing to take it over?

845

Mr. Eugene Sheehy

There wasn’t a reason. There was a request to look at it and the response, I can’t remember how that was communicated, but I don’t think there was any surprise.

846

Deputy Kieran O’Donnell

Can I go back to AIB, sorry, C3b, Vol. 2, pages 37 and 38, and I suppose the question, a very quick question I want to ask is, was there a draft provided on the night of the guarantee by the Government to the banks?

847

Mr. Eugene Sheehy

I can’t remember.

848

Deputy Kieran O’Donnell

Well, you’ve stated in your proposals, the Government submitted a form of guarantee which was inspiration. So the question, I suppose, I want to ask is, what did you get in the guarantee that in the original draft provided by Government was not there?

849

Mr. Eugene Sheehy

Well, we didn’t decide on the form of the guarantee. We were asked for our input into it.

850

Deputy Kieran O’Donnell

What did you request?

851

Mr. Eugene Sheehy

We requested that it would be two years rather than one.

852

Deputy Kieran O’Donnell

Okay.

853

Mr. Eugene Sheehy

We requested that the bonds be included and they hadn’t been as far as I know … I think … I don’t think they were in the original… it could have been a verbal—–

854

Deputy Kieran O’Donnell

So, in essence, the final agreement outside of the fact that it included Anglo and Irish Nationwide and that it included lower tier 2 subordinated debt, in substance was it the guarantee that AIB and Bank of Ireland requested?

855

Mr. Eugene Sheehy

It was based on the advice that we gave to the questions we were asked.

856

Deputy Kieran O’Donnell

But in substance was it—–

857

Mr. Eugene Sheehy

We didn’t make the guarantee. We were asked questions. We gave opinions and inputs. Other people made the decision. So you can say in substance, it was what we advised upon, that’s true.

858

Deputy Kieran O’Donnell

: Okay—–

859

Mr. Eugene Sheehy

Our advice. Yes.

860

Deputy Kieran O’Donnell

Are you required as a bank … were you required to file in any shape or form that the bank was solvent at any time in terms of Stock Exchange reporting or other requirements?

861

Mr. Eugene Sheehy

All the time. I mean, every day.

862

Deputy Kieran O’Donnell

So therefore why were you unwilling to allow … sorry … Well then, what was your objection to the element being put into the statement that the system was solvent and that all banks were solvent? If a guarantee was being put in place and you were filing on various occasions that the bank was solvent and you claim, and you make a statement here, that AIB was solvent on the night, why, by definition then, did you not agree? I would have thought it should have been a welcome development—–

863

Chairman

We’ll get your thoughts later, Deputy.

864

Mr. Eugene Sheehy

Yes, I’ve explained a few times. It was a liquidity guarantee we were looking for. Deposits is what we were guaranteeing. I referred to the fact that clarity was so important to the markets. It didn’t work in the US because of muddled communication. We wanted a guarantee of the deposits of the bank. That’s all. Anything else that was added to it wasn’t on the agenda, never came up that night until towards the end of it. It was our view that is wasn’t adding anything—–

865

Deputy Kieran O’Donnell

And finally, when you were leaving, the last meeting you had, what time was it at? And at that time, were you given the impression by Government … or who were you given an impression by that it would involve four banks with the outline of the type of guarantee that was put in place?

866

Mr. Eugene Sheehy

We assumed it was four banks. We weren’t given any indication from the Government as to whether it was four or six at the end of the day.

867

Deputy Kieran O’Donnell

What time was that?

868

Mr. Eugene Sheehy

I don’t know, I mean, I don’t know. It was … I don’t know how long we were in the room for the final period before we were asked to go home. I don’t know.

869

Deputy Kieran O’Donnell

What time did you go home at?

870

Mr. Eugene Sheehy

3.30.

871

Chairman

Okay, all right. Senator, Barrett.

872

Senator Sean D. Barrett

Thank you, Chairman and again welcome to our visitors. Was it ever discussed that you might go the ECB or consult Mr. Trichet in relation to these difficulties?

873

Mr. Eugene Sheehy

There was one meeting with Mr. Trichet some months earlier. I can’t name the date but he was in Dublin and there was a meeting of bankers that was facilitated by the Governor and Mr. Trichet came into the meeting. I don’t know what month it is.

874

Chairman

Were you in attendance at that meeting, Mr. Sheehy?

875

Mr. Eugene Sheehy

Yes.

876

Chairman

Senator.

877

Senator Sean D. Barrett

And the crisis hadn’t developed at that stage?

878

Mr. Eugene Sheehy

No, no it hadn’t. The market was, you know, beginning to unsettle, but there wasn’t a crisis at the time.

879

Senator Sean D. Barrett

But having broken the ice, so to speak, it didn’t arise that you would, in the critical week, involve him?

880

Mr. Eugene Sheehy

Well, we would only have a relationship with our own regulator. It wasn’t open to us to go past our own regulator or it wouldn’t be appropriate to go past our own regulator. There were mechanisms, ELA for instance, which was a mechanism that was available to the regulator to give loans to banks, secured loans to banks, for funding purposes but we didn’t … The regulator didn’t want that to happen because when a state regulator facilitated banks with ELA, it was published in the European communiqué from the European central banks, and that then, by extension, became a sovereign issue for that country, so I think the regulator wanted to avoid that, if it could.

881

Senator Sean D. Barrett

Okay, thank you. On B3, Vol. 1, page 6, there’s material from Mr. Treble who was looking at the loan-to-deposit ratio going up to 157% at the end of 2006, which would brought you second only to HBOS, and that is a more risky form of banking than relying on deposits and, in the same volume he said that targets were set not to go to 157% but to be less than 134% at the end of 2006. And the same document you see that coming into 2007, it was already at 162%. Was that not a risky way to respond to Mr. Treble’s concerns about that issue?

882

Mr. Eugene Sheehy

Mr. Treble wrote a report in the spring of ‘09 as a look back at what went wrong. He also had … he was a treasurer, you know, for part of his time, so he would have a view on this and a responsibility …. The loan-to-deposit ratio that we had was targeted to be in the middle of our peer group and if you look at Regling & Watson, page 34, table 12, you’ll find that AIB was 143%, Bank of Ireland 173%, Anglo 127% and others up to 250% – that’s Irish Life and that’s … I just use data points to show you how unreliable a measure a loan-to-deposit ratio is, because the far more important one is the adjusted loan-to-deposit ratio which imposes constraints. You could fund … you could have huge amounts of deposits that were very volatile and very short.

883

Senator Sean D. Barrett

Okay, thank you on that. Now, there was …. for Mr. Buckley … this is the last one, thanks very much, Chairman. The organisation … On page 4 of your speech, Mr. Buckley: “The organisational reshaping involved centralising as much as positive routine transactional and processing services out of branches, it involved creating a centralised mortgage processing and decision-making centre”. Now, if I could direct to B2 on page 8, the internal auditor says: “There were only three staff members in place in the Galway office who had the skills to manage cases on a daily basis, which includes an assistant manager with responsibility for the unit. This could lead to the bank missing significant events or accounts and the subsequent financial loss,” which NAMA had said to us, but it is a theory that a solvent bank with a long history like yours went wrong the day it reduced the power of local managers. Mr. Sheehy did refer to the bank being nearer the customer and centralised everything and Galway, in particular, is mentioned, by the internal auditor as having experienced that difficult. And we did find an emphasis on extending new mortgages rather than servicing the old ones.

884

Mr. Michael Buckley

I think, Senator, you’re connecting two different things there if I may say so but I just haven’t had … haven’t been able to get at the document here that you are referring to.

885

Senator Sean D. Barrett

B2, Vol. 1, page 8, if it comes up on your screen.

886

Mr. Michael Buckley

B2, Vol. 1, page 8, yes, thank you. In my B2, Vol. 1, page 8 ….

887

Senator Sean D. Barrett

Maybe I got the lucky one …. yes, B2, Vol. 1, page 8—–

888

Mr. Michael Buckley

Sorry, Senator, I think I’m right in what I’m saying subject to correction. The first thing you mentioned was about centralising our mortgage decision-making processing out of the branches and that was done. And I think that was a good decision and it meant that there was consistency in decision-making and in dealing with any exceptional situation. The second thing … the audit report from my recollection over the last two months of reading thousands of pages is an audit report which is talking about our work-out teams managing loans … commercial loans that had gone bad. So the two things are actually not connected, if I may say so, in the way that you’re connecting them.

889

Senator Sean D. Barrett

Well he does say: ‘”This could lead to the bank missing—–

890

Chairman

I need a reference, can you just show me, Senator, just put up the booklet a second so I can … can you just show me the cover?

891

Senator Sean D. Barrett

It’s B2, Vol. 1.

892

Senator Susan O’Keeffe

It’s B2, Vol. 1, page 21, 31 March.

893

Chairman

Page 21. Thank you.

894

Mr. Michael Buckley

Yes, it is … I think I’m right, Senator. The first point you made was about mortgages and how we were organised to make decisions on mortgages. This, I think, is the … we had, from recollection, three work-out teams on commercial lending in different … you know, Dublin, I think Cork and Galway is what I recollect, and he is making the point here that there was a resourcing issue in Galway, and it’s a factual point, and there’s an agreed management action against it. “I agree with the point raised”, which is what whoever the manager was said, “and agree to sit down by the 30th of June to develop and agree a staffing action plan.” It’s signed by the senior executive in lending in commercial banking, so there was a resourcing issue. It could have … if it was left to continue it could have had those consequences, but the manager concerned or the executive concerned committed to dealing with it and to be honest, I don’t know what happened after that but it sounds to me like quite a straightforward situation.

895

Senator Sean D. Barrett

Except that NAMA also found it a problem much later. Thank you very much. Thanks Chairman.

896

Chairman

Okay I’m going to bring matters … just I’m … not a question, only just a just clarification, yes?

897

Senator Michael D’Arcy

On the matter of the question that I put to Mr. Donal Forde, on page 125 of the transcript —–

898

Chairman

Of which transcript now?

899

Senator Michael D’Arcy

Last week’s, Thursday. We had a meeting at 9.30 a.m. I questioned Mr. Forde, “The expansion of the loan book of AIB for property and construction averaged 29% per annum, and that was in the sector that you were in charge of. Would you have considered your growth in that sector reckless?” His response is, “No. I didn’t then.” I questioned, “Do you now?” Mr. Forde says, “Yes, in hindsight … reckless is a strong word.” Thank you very much.

900

Chairman

Okay thank you very much. Right, I’m going to bring matters to a close. If Mr. Sheehy or Mr. Buckley would like to add anything further I’ll just give you a moment now.

901

Mr. Eugene Sheehy

No.

902

Mr. Michael Buckley

No.

903

Chairman

Nothing. Okay thank you. Okay so with that said I would like to thank Mr. Buckley and Mr. Sheehy for their participation here today and for their engagement with the inquiry. The witnesses are now excused and I propose that we will break until 2.45 p.m. if that’s agreeable to members. Okay? Thank you.

904

Sitting suspended at 1.45 p.m. and resumed at 2.50 p.m.

29/04/2015: Michael Buckley – Former Group Chief Executive, AIB

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