By: Will Chu
In 1986, Sean FitzPatrick became chief executive of a small Irish commercial lender known as the City of Dublin Bank. Over the course of the next 18 years, FitzPatrick oversaw the growth of the City of Dublin bank into the 3rd largest bank in Ireland. By May 2007 the bank, now known as the Anglo Irish Bank, reached a peak value of €13 billion with a share price of €17.60.
Little over a year later, in December 2008, FitzPatrick stunned the financial world by announcing his resignation as chairman of the Anglo Irish Bank. The revelation that FitzPatrick had hidden over €87 million in loans he had made to himself capped off a tumultuous series of months that had seen the Bank’s value drop from a high of €13 billion to a low of €242 million. In the coming days, several more directors resigned over loan irregularities that threatened the financial integrity of the bank.
On 15 January 2009, the Irish government announced that it would nationalize the beleaguered bank. What went wrong? This case study will attempt to examine the ethical failings by senior executives that led to the collapse of the Anglo Irish Bank and continue to plague it to this day.
- Anglo Irish Bank: An Irish bank headquartered in Dublin, the Anglo Irish bank was involved mainly in business and commercial banking. The bank was heavily exposed to property lending and was severely affected by global downturn in housing markets in 2007-2008.
- Sean FitzPatrick: Was chief executive of the Anglo Irish Bank from 1986-2005 and oversaw its growth from a small city bank to national force. In 2005 he appointed a new chief executive, David Drumm, and became chairman of the Anglo Irish.
- Irish Nationwide Building Society: A prominent Irish financial services company. It was later revealed that Sean FitzPatrick and other Anglo Irish board directors were hiding loans by temporarily transferring them to Irish Nationwide Building Society.
- John Bowe: A senior Anglo Irish executive. Bowe was a part of the negotiating team that worked on the terms of a bailout deal before it was determined that the Anglo Irish bank was to be nationalized.
From 1995 to 2006 the Celtic Tiger economy of Ireland experienced substantial growth. Weak regulations and lax supervision allowed Irish banks to borrow heavily in the international money market. Most of these borrowings were in turn loaned to Irish property developers, creating a boom in the Irish property market. Consequently, Ireland was heavily impacted by the global financial crisis of 2007. The freezing up of international money markets made it impossible for Irish banks to continue borrowing at the luxurious rates they had enjoyed before. Without the ability to borrow money, Irish banks were unable to continue making property loans, causing a collapse of the property market. Falling prices in the property market meant the assets of Irish banks were now considerably lower than their liabilities, creating a banking crisis.
With the solvency of the Irish banking system threatened, the Irish government moved quickly to inject capital in the banks to keep them afloat. In September 2008, the Irish government made guarantees to several of the largest Irish banks, Anglo Irish included. Indeed, recapitalization would be carried out at the two largest Irish banks: the Allied Irish Bank and the Bank of Ireland. But at the Anglo Irish Bank, the revelation of a major loan scandal meant that would throw a wrench into the government’s recapitalization plan.
Like the other major Irish banks, Anglo Irish was hard hit by the downturn in the property market. But the problems at Anglo Irish were much more complicated. From 2000 to 2008, Sean FitzPatrick used Anglo Irish funds to make massive loans to himself. These personal loans were hidden from the public and from regulators by moving the loans temporarily to another bank to avoid an end of year audit.
The Irish banking crisis unexpectedly revealed FitzPatrick’s scheme. Faced with increased scrutiny, FitzPatrick was forced to admit he had personally hidden €87 million in loans. After further investigation, it was revealed that although directors were recorded as having €41 million in personal loans from Anglo Irish, the true figure was €150 million.
Ethical Failings of FitzPatrick
Immediately after FitzPatrick’s resignation, the legality of his actions was called into question. FitzPatrick and Anglo Irish continue to state that the loans were legal and did not represent a violation of Irish banking regulations. Still even if FitzPatrick did not violate the law, he clearly failed to act in a virtuous and ethical manner.
Virtue ethics focuses on the character of the moral actor. A person is considered ethical if his actions reflect positive character traits and moral motivations. By examining the character traits of integrity, trust, fairness, self-control, and humility, clearly, FitzPatrick did not act virtuously while heading the Anglo Irish:
Integrity: The act of loaning himself €87 million seems a questionable moral act, but FitzPatrick’s decision to hide the loans shows a lack of integrity. Instead he purposefully misled the public and his own employees of the Anglo Irish bank.
Trust: FitzPatrick broke the trust of investors and other Anglo Irish directors continuously from 2000 to 2008 by hiding the loans. Although he never denied the existence of the loans once they were uncovered, his failure to properly disclose the loans showed the he acted in less than truthful manner. Consequently, he deceived the general public into thinking Anglo Irish was more financially sound than it really was.
Fairness: FitzPatrick’s actions were not fair to the investors of Anglo Irish. If investors had known the chairman of Anglo Irish was making massive and risky loans to himself, they could have acted on the information. By faking Anglo Irish loan records, FitzPatrick created market distortions that affected the bank’s share price.
Self Control: FitzPatrick failed to exercise proper self-control. The large loans he made to himself show he was motivated by greed and perhaps had grossly over estimated his own financial prowess. If FitzPatrick had proper self-control he would not have made these massive loans or at least would have properly reported them.
Humility: Even after FitzPatrick’s loans were revealed, he failed to act with humility. Instead he continued to insist Anglo Irish’s problems were the result of global circumstances out of his control and refused to apologize to the Irish public who in the coming days would be forced to foot the bill for his mistakes.
After Sean FitzPatrick’s resignation, several more Anglo Irish directors would resign over controversial personal loans. These included:
Chief Executive David Drumm to whom the Anglo Irish made an €8m loan
Chief Risk Officer Willie McAteer to whom the the bank also made an €8m loan
Managing Director Pat Whelan who was discovered to owe the Anglo Irish €5.8m in personal loans.
The resignations and the revelation of additional hidden loans sparked outrage among the Irish public. Despite accusations of fraud, the lax nature of the Irish regulatory state made it unclear whether any crime was committed and consequently, no arrests were immediately made.
Meanwhile it was revealed Sean FitzPatrick and the other directors of the Anglo Irish had used these personal loans to fund ill advised business ventures and property investments. The Anglo Irish bank’s troubles were further compounded when it learned FitzPatrick would be unable to payoff his massive personal loans after a failed oil venture in Africa and a stake in an Asian casino stalled. FitzPatrick, along with a few other former Anglo Irish directors, would declare bankruptcy, dashing hopes the loans would be recovered in a timely manner.
It would not be until 2010 when the slow moving Garda Bureau of Fraud Investigation begins investigating former Anglo Irish executives. In March of 2010, The Garda police force arrested and charged Sean FitzPatrick with 16 counts of fraud. In 2012, Willie McAteer would join FitzPatrick as the second former Anglo Irish director to be arrested and charged with fraud. FitzPatrick was found not guilty of charges he illegally loaned tens of millions of euros to prop up the share price of Anglo Irish Bank. William McAteer was sentenced to 240 hours of community service for giving illegal loans to developers to buy shares in the bank.
Nationalization of the Anglo Irish
FitzPatrick and the other board members of the Anglo Irish’s failure to act in a virtuous manner while heading Anglo Irish spelled doom for the bank and led to serious consequences for the Irish taxpayer. As head of the Anglo Irish for nearly 20 years, FitzPartick’s integrity was closely linked to the integrity of the entire bank. The tarnishing of FitzPartick’s and the senior management team’s reputation consequently tarnished the reputation of the Anglo Irish. By falsifying loan keeping records, FitzPatrick called into question the entire financial security of the bank. Investors could no longer be certain of anything when it came to the Anglo Irish Bank. Subsequently confidence in the bank collapsed as investors deserted it and depositors made massive withdrawals. It was soon determined that recapitalization alone was insufficient to restore confidence in the Anglo Irish.
The failure of the 3rd largest bank in Ireland would have serious ramifications for the entire Irish economy. Nationalization was seen as the only way to save the bank after the damage done to its reputation following the revelation of FitzPatrick’s ethical failings. In order to protect the health of the banking system, the Irish government was forced to take steps to nationalize the bank. The Anglo Irish Bank Corporation Bill 2009 that enabled the government to nationalize the bank was narrowly approved by the Irish lower house before passing without a vote in the upper house on 20 January 2009. The Irish President signed the bill the following day.
Further troubles at the Anglo Irish
The troubles with the Anglo Irish would not end with nationalization. Following the government takeover, Irish authorities ordered a wholesale investigation into all Anglo Irish dealings, revealing additional ethical failings by senior executives and creating further pain for the Irish taxpayer. These revelations would further damage the reputation of the Anglo Irish bank, leading to serious problems for the Irish government as it struggled to make the bank solvent once more.
In 2013, tape recordings allegedly revealed senior executives deliberately misled government officials during the 2008 crisis. The tapes feature senior manager John Bowe, who was involved in negotiations with the Irish government, laughing and joking as he talks with another Anglo Irish executive. Bowe explains that executives at Anglo Irish knew full well the €7 billion in bailouts they had asked for was in fact not enough to save the bank. When asked how the €7 billion number was reached, Bowe is heard to say “”Just, as Drummer (then-CEO David Drumm) would say, ‘picked it out of my arse’.” The €7 billion number was a deliberate lie meant to lure the government into providing funds for the bank. Bowe states “The strategy here is you pull them in, you get them to write a big cheque and they have to keep – they have to support their money.” From Bowe’s comments it is clear the Anglo Irish strategy was to force the government into continuing to prop up the bank. Taxpayers would be left with no choice but to continue to provide loans to support the bank. Later in the recording, Bowe is heard to joke about there being no realistic way for the loans to be ever repaid.
Analysis of Ethical Failings
The release of the tape recordings reveal a dangerous culture of immoral behavior at the top levels of the bank. By acting in an unethical manner, the senior executives at Anglo Irish caused the bank’s collapse and serious repercussions for Irish taxpayers, who paid the bill for Anglo Irish’s unethical practices. The primary virtues the executives at Anglo Irish lacked were integrity, compassion, and courage:
Integrity: The senior executives at Anglo Irish failed to act with integrity. Intentionally misleading the government was a deliberate unethical act that would cost Irish taxpayers billions of euros. Furthermore, the actions of the senior executives of Anglo Irish also stained the integrity of the Anglo Irish bank, which continues to struggle to this day.
Compassion: The jovial manner in which senior executives discussed forcing Irish taxpayers to pay for bank mistakes shows a distinct lack of compassion. Indeed it was reported that chief executive David Drumm wrote: “This is Anglo, so there is only one thing to do – party!” in an email to staff during the height of the crisis. This lack of compassion represents an ethical failure that destroyed the Anglo Irish’s relationship with the public, who were forced to pay for the bank’s mistakes.
Courage: Senior executives at Anglo Irish showed a distinct lack of courage. Instead of admitting their mistakes and owning up to the possible consequences, Anglo Irish executives lied about the extent of their financial losses in order to mislead the government into thinking the bank could be saved.
The Anglo Irish Today
Following its nationalization, the Anglo Irish was flooded with funds from the Irish government to restore investor confidence. The continuing flow of funds did little however to stem the bleeding. In 2011 the Anglo Irish Bank would announce a loss of €17.7 billion, the largest loss in Irish corporate history. Subsequently, an effort was made to distance the Anglo Irish from its past ethical failings. Anglo Irish signage and symbols were removed from all the Bank’s holdings and in October 2011, the Anglo Irish merged with Irish Nationwide Building Society, changing its name to the Irish Bank Resolution Corporation. As stated by Irish Minister for Finance Michael Noonan, the name change was needed to remove “the negative international references associated with the appalling failings of both institutions and their previous managements.” It was estimated that the eventual cost of the nationalization of the Anglo Irish Bank would be over €29.3 billion.
Using a virtue ethics framework, it can be seen there were numerous ethical failings that led to the collapse of the bank. The failure of Anglo Irish executives to practice virtue ethics caused the reputation of the bank to be destroyed, leading to its near collapse and nationalization. The distrust of banks caused by the ethical failings of Anglo Irish executives continues to haunt Ireland to this day as it struggles to rebuild a credible banking system with integrity. Indeed, Anglo Irish was so plagued by the ethical failings of FitzPatrick and other senior managers that the bank’s name had to be changed in 2011 in an effort to avoid the stain associated with it.
The experience of the Anglo Irish bank suggests there is a need for tighter government regulation and supervision, improved corporate governance, and increased consumer scrutiny. But most of all, the fall of the Anglo Irish bank shows there needs to be a greater focus on financial virtue ethics. At Anglo Irish, a rotten immoral and unethical culture was allowed to fester for years before it collapsed in on itself. Better education and awareness of the hazards of acting in an unethical way could allow future generations to avoid bank failures like the one seen at the Anglo Irish bank.
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