Turning Point
Fitzwilliam’s alarm was turning into cold fear, the bad news was coming in hard and fast. The whole financial world, urged on by insatiable politicians, had embarked on an orgy of collective folly in the pursuit of everlasting growth. The consequences of their irrational ambitions spread like a bushfire.
Suddenly the attention was focused on Sweden. The country’s banks found themselves in deep trouble as its loans to the Baltic states were going bad. They had lent over seventy five billion dollars to the Baltic trio: Latvia, Lithuania and Estonia. Latvia was now in difficulty after it failed to sell one single treasury note at a debt auction, with the growing risk that Sweden would be drawn into their down spiral.
Latvians, attracted by lower interest rates, had contracted loans in euros and Swiss francs, and with the brutal fifty percent fall in property prices and a twenty percent decline in the country’s economy, the deeply indebted nation was facing ruin. The extent of Sweden’s exposure to the Baltic crisis was equivalent to twenty percent of its own GDP, bringing the threat an Icelandic style disaster to its door.
Whatever the cause of the Baltic countries’ problems they spelled trouble for the Irish Netherlands Bank, which formed part of a Swedish banking pool that had raised loans for now stalled commercial property developments in Riga, the Latvian capital. That was Kennedy’s doing, his love for the exotic and his pretended knowledge of the Baltic countries, which was in reality limited to a better forgotten, more than shady deal with a certain Russian gangster almost a decade before in the Estonian capital of Tallinn.
The failed Latvian bond auction increased fears that Latvia would be forced to devalue its currency that was linked to the euro, creating a domino effect and pulling down other two Baltic states. The consequences were write downs running into almost one hundred million euros by the bank, and if Latvia was forced to devalue its currency the bank would be forced to write down its loans with massive losses.
The bad news seemed almost endless, the Irish Netherlands Bank was reeling like a punch drunk fighter as it took another blow when the owners of Canary Warf, in which the Nassau Fund was a stake holder, were suddenly on the point of breaching their banking covenants on an eight hundred million pound loan as a consequence of plunging property values. It was a re-run of the bankruptcy of the former owners in 1992, which had also been due to a fall in the price of commercial property. However, the office towers were still occupied and ironically the owners were covered against rental defaults by the US insurer AIG, itself in difficulty.
Falling property values would push Fitzwilliams’ fund close to its loan to value covenants. The only solution was fresh cash. Why had Fitzwilliams not seen the trouble coming? Strange considering he had been brought up in an aristocratic and conservative banking family, banking was in his blood. And even stranger given his education and training. He had studied at the LSE and Harvard and his thesis covered John Kenneth Galbraith’s work on the Great Depression. Since one could not have said that Fitzwilliams was ignorant, or stupid, then he must have been either greedy or driven by an overwhelming ambition for power, or perhaps both.
Brendan Flaherty, the bank’s risk and compliance officer, had tried to warn Fitzwilliams that the bank was expanding too fast and that there existed a serious risk to its financial stability, however his warning had been joshingly brushed aside with Fitzwilliams telling him he was too old fashioned.
Flaherty had asked himself why the bank loaned money to buy assets worth the same, or even less than the amount of the loan, on the sole assumption the asset would always to rise in value. It did not need a financial genius to realize this could not work beyond a very short period of time. So how was it that Fitzwilliams refused to accept the basic tenets of good banking? It was not in Flaherty’s interest to insist, though being responsible for risk and compliance he knew he was wrong to let the bank do what it was doing. Closing his eyes to the dangers, he consoled his conscience with the idea that it was some kind of a new paradigm he had not yet understood.
A serious lack of good governance was a common state of affairs in the City, which should have been visible to any intelligent and responsible regulator in normal times. As the result of a coup d’état operated by the top management against the legitimate shareholders of many financial institutions, checks and controls that should have linked internal auditors, directors and the chief executive, as well as external auditors and the FSA were overridden.
Flaherty yielding to his fear of Fitzwilliams, and to a lesser degree Kennedy, overlooked the obvious; growth based almost exclusively on the unsustainable rise in property prices and easy credit was the path to inevitable disaster. Flaherty’s duty was to oversee the sufficiency and effectiveness of the system, its controls, and the mandatory compliance with FSA requirements. Failure to sound the alarm could have been considered as neglect of duty and resulted in disciplinary action by the FSA, but Flaherty was not alone, he simply followed in step with his kind as the whole City advanced in its relentless march to disaster.
The Irish Netherlands Bank, like so many other banks, had developed a culture that was blindly dedicated to growth with inadequate attention to risk. The concept of a banker’s duty to conduct his business with due care and diligence had been cast out the window. Borrow and spend, spend and get rich had been Cool Britannia’s trade mark with smiling head boy Tony Blair at the helm, encouraging bankers to invent even more extravagantly strange products, shovelling out money by the bucketful to naïve British consumers who were slowly being drowned in an ocean of debt in the erroneous belief they were getting richer.
Millionaires had been created overnight, people like one of Fitzwilliams’ good time friends, Richard Brent, who had gone from riches to rags in the blink of an eye and was reduced to living a small flat over a café in the centre of Poole struggling to come to terms with his changed circumstances. Brent was one of those who had been worth millions, but unreasonably property speculation had brought him back to earth with a crash.
Brent frequented Fitzwilliams’ Poole clique, and was seen wining and dinning in their favourite restaurant, the fashionable Chaika, where conversation invariably turned to money, business, interest rates and profits. Like so many of their fellow citizens they could no longer hold a conversation without boasting of their latest acquisition, whether it was a home or a motor yacht.
A Last Fling