HOUSES OF THE OIREACHTAS Volume 2 No. 3 Morning No. 4 Afternoon AN COMHCHOISTE FIOSRÚCHÁIN I DTAOBH NA GÉARCHÉIME BAINCÉI- REACHTA JOINT COMMITTEE OF INQUIRY INTO THE BANKING CRISIS Déardaoin, 23 Aibreán 2015 Thursday, 23 April 2015 The Committee met at 9.30 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. 1 NEXUS PHASE Nexus Phase AIB - Mr. Dermot Gleeson Chairman: I now propose that, as we have a quorum, the Joint Committee of Inquiry into the Banking Crisis will now go into public session. Is that agreed? Agreed. We commence this morning’s proceedings, session 1, public hearing, and a discussion with Mr. Dermot Gleeson, former chairman of Allied Irish Banks. In doing so, I would like to wel- come everyone to the 20th public hearing of the Joint Committee of Inquiry into the Banking Crisis and this morning we will hear from Mr. Dermot Gleeson, former chairman of Allied Irish Banks. Mr. Gleeson was a leading barrister and senior counsel in Ireland in the 1980s and 1990s before he became a senior Government adviser and then a businessman. He served as At- torney General of Ireland in the Government of Taoiseach John Bruton. In 2003, Mr. Gleeson was appointed chairman of Allied Irish Banks. Mr. Gleeson, you are very welcome before the inquiry this morning. Mr. Dermot Gleeson: Thank you, Chairman. Chairman: Before I hear from the witness, I just wish to advise the witness 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 ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those pro- ceedings. Members of the public are reminded that photography is prohibited in the committee room and to assist the smooth running of the inquiry, we will display certain documents in the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on a screen to your left and members of the public and journalists are reminded that these documents are confidential and not for publication, but will be displayed to assist the pro- ceedings as they take place over the coming weeks. The witness has 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 part of ... these are before the committee which will be relied upon in questioning and form part of the evidence of the inquiry. So if I can now, before we commence proceedings, ask the clerk to administer the oath of affirmation to Mr. Gleeson? The following witness was sworn in by the Clerk to the Committee: Mr. Dermot Gleeson, former Chairman, AIB. Chairman: Thank you Mr. Gleeson, so if I can ask you to make your opening remarks to the committee please. Mr. Dermot Gleeson: Thank you Chairman. 2 JOINT COMMITTEE OF INQUIRY INTO THE BANKING CRISIS Mr. Chairman and members of the committee, I have furnished a written statement to the committee in accordance with its request to me. It may be of assistance to the committee if I say at the outset that so far as the macro story is concerned, without agreeing with every conclusion or every detail, in general I accept the broad thrust of the official reports prepared by Messrs Honohan, Regling and Watson and Nyberg, as well as the views ... most of the views anyway put forward by Dr. Donal Donovan and Professor Anton Murphy. Irish banks, by and large, avoided the mistakes that wrought havoc in the balance sheets of American, continental European and British banks where credit derivatives and CDOs did the damage. Unfortunately, Irish banks made mistakes of their own, principally by excessive lending for residential and commercial development and these mistakes became exposed at the same time as international money markets shut up shop in September 2008. AIB lent too much to individual developers, put too much faith in cross-collateralisation, too much faith in the large net worth of individual developers. We didn’t do enough syndica- tion or selling down of loans and, in addition, we relied excessively on risk models that proved inadequate to the cataclysmic events of ‘09 ... ‘08 and ‘09. On 5 March last, the Minister for Finance and the current CEO of AIB, Mr. Duffy, made the very welcome announcement that AIB is on course to repay the total investment made by the State in the bank. The great recession of 2008, the worst the world had seen for 80 years, didn’t start in Ireland or in the Irish banks, but there’s no doubt that there were decisions made in AIB which made things worse than they need have been for citizens, for employees and for shareholders. I wish to express my sincere regret for my part in those events, and to renew the apology which I made at the AIB AGM in 2009. In analysing what went wrong at AIB, I should point out that I resigned from the board in June 2009 and my perspective is, therefore, largely limited to information that became available before my departure - I haven’t worked there for the last six years - and may to that extent, be incomplete. A country’s banking system has been described as the nervous system of the economy, and in that sense the largest indigenous bank was never going to separate itself from the dominant economic activity of the society in which it functioned. In the years leading up to 2008, a prin- cipal engine of economic growth in Ireland was property and construction. It created a lot of jobs in connected trades and professions, paid lots of taxes, was encouraged by the State and the banks were fully involved in it. Quite apart from the tax incentives that I know the Committee has heard a lot about in relation to property, local----- Senator Marc MacSharry: Can I interrupt, Chairman? Have we got this statement? Chairman: Yes. Senator Marc MacSharry: Where is it? Is this the statement that you have provided? Mr. Dermot Gleeson: No, this is my oral statement, the statement I have provided----- Senator Marc MacSharry: And have we a copy, no? Chairman: Are you drawing from the opening statement? 3 NEXUS PHASE Mr. Dermot Gleeson: I am drawing from the opening statement. You asked me to shorten it and I did. I am surprised ... it is not my intention to do anything other than----- Senator Marc MacSharry: No problem. Chairman: Please continue Mr. Gleeson. Mr. Dermot Gleeson: Apart from the tax incentives in property and construction that you have heard a good bit about I know already in the committee. Local authorities collected over €3 billion through development contributions imposed as part of planning permissions between ‘99 and 2008. It’s perfectly clear in retrospect that the appetite for risk was excessive and the lending strategy of AIB in respect of property was too expansive. That’s not actually how it appeared at the time. In 2007, for instance, there was a strong national consensus widely con- firmed by international commentators that Ireland was on a track of rapid sustainable expansion and development, and a good example is provided by the statements made at the launch of the national development plan in 2007. Just one detail from it: it was planned to spend €70 million a day every day for seven years on infrastructure with full employment, net inward migration, low debt-to-GDP ratio, budget surplus and buoyant tax revenue, and lots of civil servants were about to move out of Dublin. Martin Wolf, who has been described as the most respected fi- nancial columnist, expressed the view in June 2007 that the possibility of huge calamities being generated by financial markets looked remote. The IMF, in its financial stability report in 2006, expressed the view that risk dispersion as now organised in banks was less - made banking fail- ures less likely. And of course, the reverse turned out to be the case. In viewings with the benefit of hindsight, looking back now, it seems to me that a great deal of the issue in Ireland comes back to the question of whether at a certain stage a correction that was coming was going to arrive in the form of a so-called soft or hard landing. I think that’s central to the errors. The OECD, the EU, the IMF, the ECB, the Central Bank, the Depart- ment of Finance, the ESRI, the great majority of published economists in Ireland and abroad, although not all, the risk section of AIB and the board of AIB all favoured the consensus of the soft landing and the consensus, of course, was entirely wrong. There’s a striking example or expression, I suppose, of this consensus comes from the OECD report published on Irish banks in April 2008.