Ship of Fools

In fact, these obvious answers were all wrong. From 2002 onwards, the largest source of foreign direct investment into Ireland was the Netherlands (€10.7 billion that year, compared to €7.9 billion from the USA). In 2003, €8.6 billion came from the Netherlands, while flows from the US were actually negative, with more going out in repatriated profits than came in through investment. Even in 2007, when North American investment doubled to €31 billion, it was still less than the €33 billion that came from the Netherlands.

Where was this vast Dutch investment coming from? Was Shell oil buying up the entire country? Were the Dutch rat-race refuseniks who set up smallholdings in rural Ireland in the 1970s planning an unimaginable expansion of their organic cheese-making operations? In fact the money was mostly connected to high-level financial juggling by American-owned transnational corporations, with their Dutch-based treasury-management subsidiaries routing capital flows through Dublin.

The answer to the second question was equally surprising. The largest single component of the stock of foreign-owned assets in Ireland was not in either information technology or pharmaceuticals, it was in the International Financial Services Centre (IFSC) in Dublin, which is essentially a tax haven for global finance. The prominence of world-leading transnational firms like Intel or Pfizer may have defined the Irish economic landscape. Their presence was solid and reassuring - whatever anyone thought of them, however much we knew about their repatriation of vast profits every year, they were global industrial titans, producing real products for real export markets. But they were dwarfed by the sheer scale of money that was pumped through the IFSC. In 2005, for example, the IFSC accounted for approximately 75 per cent of all foreign investment in Ireland. Yet it was not particularly surprising that most Irish people would not have known this, for it was not easy to understand exactly what many of the companies in the IFSC were up to.

And, to answer the third question, the largest Irish bank was not AIB, but the giant German operation Depfa (short for Deutsche Pfandbriefanstalt), a specialist lender to governments and municipalities that transferred its global headquarters to the IFSC in Dublin in 2002. Its global centre at Harbourmaster Place on the River Liffey had just 319 employees, but claimed assets in 2003 of $218 billion. Depfa had been as German as sauerkraut - it was founded by the Prussian government in 1922 and it was still listed on the Frankfurt stock exchange. But it was now as Irish as bacon and cabbage.

The IFSC was established in 1987 by Charles Haughey, at the suggestion of one his financial backers, Dermot Desmond, specifically to persuade international finance companies to set up offices in a new, American-designed development at Custom House Docks on the Liffey, just a few minutes east of Dublin’s city centre. The incentive was simple: a 10 per cent rate of corporation tax. (The IFSC moved in 2005 to a 12.5 per cent tax rate and companies were allowed to locate themselves outside the Custom House Docks centre.)

The IFSC worked. It attracted half of the world’s top fifty banks and top twenty insurance companies, alongside another 1,200 operations of various sizes. By 2003, Ireland was the main global location for money market mutual funds (a total of $125 billion in these funds was domiciled in Dublin), overtaking its old spiritual hinterland of the Cayman Islands. In the same year, Dublin’s investment funds industry (valued at $480 billion) surpassed London’s. Hedge fund managers liked the place: by 2004, over $200 billion in hedge fund assets were being serviced in Dublin.

The IFSC eventually employed 25,000 people, many of them on high salaries. In spite of the low tax rate, it contributed, at its height in 2006, €1.2 billion in taxes to the government. But there was a price to pay for these blessings. The attraction of the IFSC for the global finance industry was not just low taxation. It was also lax, and in some cases virtually non-existent, regulation. The Irish state acquired an incentive to keep banking supervision to a minimum.

Any urge to beef up regulation after the DIRT and Ansbacher scandals was outweighed by the belief that the Irish tradition of looking the other way while banks passed funny money around was actually an economic asset. Ethitical banking went global. While the embodiment of Irish banking culture had been the bogus non-resident, now it became the bogus resident. The unreality of Irish people pretending to be elsewhere was replaced by the unreality of foreign people pretending to be in Ireland.

In February 2009, the Guardian newspaper sent reporters to Dublin to check out the ‘head offices’ of British companies that were now ‘domiciled’ in Ireland: ‘One such “headquarters” turned out to be merely the premises of the company’s accountants. Other multi-nationals had just a handful of staff at work, no nameplates outside, or occupied the premises only sporadically . . . Tarsus, a business media group, says its new Irish headquarters is in a redeveloped Dublin dock by the river Liffey. But when we went there, it appeared to be merely the premises of their tax advisers, PWC [Price Waterhouse Coopers]. Henderson Global Investors has only three staff at its Dublin suite of off-the-shelf rental offices, compared with 550 who continue to work at its main London office. A receptionist in Ireland said: ‘They are not here a lot of the time.’ Charter Engineers has no nameplate on its temporary offices, and the company secretary - one of only five staff - flies in on Monday and home again on Friday.’

Under Irish tax law, a corporation can pay its entire tax bill in Ireland if ‘its central management and control are located in the state’. The ghostly presences traced by the Guardian are the ciphers of ‘central management and control’ that allow companies to pay tax at generous Irish rates rather than more stringent British ones. The Guardian revelations prompted the Treasury spokesman of the Liberal Democrats to call Dublin ‘Lichtenstein on the Liffey’.

If the Irish had a right to be insulted by this description, it was only because we tended to prefer warmer, Caribbean climes. The Cayman Islands, as we have seen, was a virtual fifth province in the 1980s. And in fact, the official equivalent that the IFSC was seeking was also West Indian: in 2003, referring to the IFSC, the state’s Industrial Development Agency (IDA) actually boasted that ‘There has been rapid growth in the Irish insurance and reinsurance industries in recent years, with Dublin fast becoming the Bermuda of Europe.’

The main force behind the creation of this shadow economy was the attraction to Dublin of the treasury management arms of transnational corporations (TNCs). The purpose of these companies is to rationalise the flows of capital between different parts of a global group and, of course, to ensure that the overall tax bill is as meagre as the magic of financial wizardry can make it. The IFSC, with its low corporation tax rates, tax exemptions on dividends and interest payments, and access to Ireland’s large range of bilateral tax treaties, was attractive in this light. The 12.5 per cent tax rate was a little over a third of that prevailing in the US and most of Western Europe. By 2002, Ireland had become the single largest location of declared pre-tax profits for US firms (followed, aptly, by Bermuda).

The other attraction, though, was the lack of regulation, or what the IDA called ‘a flexible and business focused tax and regulatory system’. In the case of treasury management operations, the business-focused regulatory system had two aspects. Firstly, these treasury arms of TNCs were allowed to set themselves up as banks. And secondly, the Central Bank and its supervisory arm (known firstly as the Irish Financial Services Authority and then as the Financial Regulator) agreed not to regulate them.

As the IDA put it for the benefit of potential clients: ‘In 1998, the Regulator revised its Bank licensing regulations and it may now accept, under certain circumstances, applications from corporate entities to be licensed as Banks. In the case of most group treasury and asset financing operations the Regulator has disapplied its powers of supervision.’ The word ‘disapplied’ was a wonderful Irish coinage. Global corporations, in other words, could establish unsupervised banks in Dublin. At the height of the boom, there were over 400 of these firms at the IFSC - there are now around 350.

These entities were usually subsidiaries of subsidiaries, owned by companies that the corporations had already established in other countries, many of them tax havens or low-tax jurisdictions. (In thirty-two of the forty-six cases that Trinity College Dublin economist Jim Stewart studied, the parent company of the Irish operation was located in a tax haven.) Thus, 3Com IFSC, the Irish affiliate of 3Com, is registered in the Cayman Islands; Kinsale Financial Services, the IFSC offshoot of Eli Lilly, is registered in Switzerland; Pfizer International Bank Europe is registered in the Isle of Man, and Brangate, the IFSC arm of Tyco, is registered in Luxembourg. Some of these companies were like Babushka dolls: Xerox Leasing is the Irish subsidiary of a Jersey subsidiary of a Greek subsidiary of the US photocopy machine manufacturer.

These convoluted structures were not accidental. One of the measures proposed by the Obama presidency in the US in 2009, for example, was to permit transnational corporations to have only one layer of subsidiary ownership for tax purposes. The accompanying Congressional memorandum on tax havens specifically cited Ireland: ‘Thus, a U.S. parent with a subsidiary in Ireland could treat that subsidiary as a branch (disregard it as a separate entity). The Irish subsidiary, however, could not treat its German subsidiary as a disregarded entity.’ The amount of money at stake is obvious from the amount of tax the US authorities expected to raise in a single year from this one measure: $86.5 billion.

For the most part, these Irish operations were front companies, with huge assets and almost no employees. Jim Stewart did a detailed study of treasury management firms in Ireland between 1998 and 2005. He was able to work out figures for forty-eight of them. The results were startling. Most had no fixed (as opposed to financial) assets and most paid no fees to directors, implying that those directors actually worked elsewhere. These were virtual entities, existing in a financial version of Second Life.

In the year 2000, for example, the firms in Stewart’s study had combined assets of $48 billion. They employed a grand total of 128 people: fewer than four employees each. In 2005, the firms had median gross assets of $643 million each. They had a grand total of seventy-five employees - on average, fewer than two each. (Twenty-eight of the forty-six had no employees at all.) With assets of $320 million dollars per job, those employees were so productive they made Stakhanov look like a slacker. Statistically, in fact, as Stewart reported, ‘the median number employed was zero for each of the years 1999-2005 and just one employee for the year 1998’.

They were, however, very useful vehicles for the transnational corporations. Their Dublin-based financial arms were able to shift huge piles of untaxed money out to the shareholders of their parent companies. For example, in 1999 alone, Brangate Limited, an IFSC-based subsidiary of the notorious American corporation Tyco, paid out a dividend of $6.6 billion. A subsidiary of Johnson and Johnson located in Ireland repatriated a dividend of €6.7 billion in 2005. Aggregate dividend outflows and distributed profits from Ireland rose from $13.2 billion in 2003 to $25.7 billion in 2006. When, in 2004, the US allowed its firms a ‘repatriation holiday’ during which they could bring in dividends from abroad at a very low tax rate, Ireland was the fourth largest source of the money that flowed in, after Holland, Switzerland and Bermuda.

For the Irish state, this whole operation seemed straightforward enough. In return for housing these front companies and allowing their parents to avoid taxes in their home countries, Ireland got no jobs, but it did get the tax revenue. Essentially, the deal was that the front companies would pony up 12.5 per cent of profits in corporation tax and the state would neither look too closely at its activities nor listen to the complaints of the foreign governments whose exchequers were losing out.

Eurofood IFSC Limited was a classic denizen of the Bahamian outpost beyond O’Connell Bridge. Established at the IFSC in 1997, it had no fixed assets, and no employees, but reported pre-tax earnings of $48 million between 1997 and 2002. It had net financial assets of almost $200 million, but its registered office was simply that of a leading firm of solicitors, McCann FitzGerald. One director was a partner in that legal firm. Another was an employee of Bank of America, which acted as Eurofood’s agent and effectively did all of its work. The other two directors were senior executives of Eurofood’s parent company, the Italian food conglomerate Parmalat, and lived in Italy.

Eurofood, in other words, was a typical IFSC front company. As the Irish Supreme Court put it: ‘The Company’s policy was decided at Parmalat headquarters in Italy, by Parmalat executives, and the Company exercised no independent decision-making function.’ Yet, as the Irish and European courts later ruled, Eurofood was an Irish company, subject to Irish law and, in theory at least, regulated by the Department of Finance, the Central Bank and the Financial Regulator.

According to the same Supreme Court ruling, the Italian directors did not always bother to attend the meetings of Eurofood’s board but ‘sometimes communicated by telephone’. One of the Italian directors was recorded as being present on six occasions but on the phone for four meetings. The other was physically present on five occasions and participating by phone on four others. Some of the Irish directors were likewise recorded at times as participating ‘by phone’.

Parmalat collapsed in late 2003 and went into administration. What emerged, according to the US Securities and Exchange Commission, was ‘one of the largest and most brazen corporate financial frauds in history’. A $4.9 billion Parmalat account with Bank of America, which the company claimed to have stowed in the Cayman Islands, did not exist. Parmalat turned out to have debts of $14 billion, more than double what it declared on its balance sheet.

To hide the debt, Parmalat simply transferred the liabilities to subsidiaries based in offshore havens. According to Enrico Bondi, the Italian bankruptcy commissioner, ‘In an attempt to hide its state of insolvency, Parmalat entangled itself in grandiose financial operations that were ever more costly.’ Eurofood, which managed Parmalat’s financial operations, was a crucial part of this operation. According to a spokesman for Parmalat’s post-collapse administrators, ‘Eurofood was deeply involved in the fraud at Parmalat . . . A large portion of the fraud involving Parmalat was at off-shore vehicles where there was little or no transparency.’

Fausto Tonna, one of Eurofood’s directors, was sentenced to thirty months in jail in Italy in 2005, having pleaded guilty to playing a leading part in the company’s spectacular scheme of faking of its accounts. The other director, Luciano Del Soldato, also pleaded guilty to fraud and got a twenty-two-month sentence. The chairman of McCann FitzGerald, the Irish law firm that had provided Eurofood with space for its brass plate and the statutory Irish resident for its board, described the episode as a case of ‘being in the wrong place at the wrong time’.

By itself, the Parmalat case should have been a warning that the lax regime at the IFSC was wide open to abuse. There was, however, another area of concern, and it arose from one of the success stories of the IFSC, its ability to attract a large slice of the global reinsurance market. By 2003, 10 per cent of that worldwide market was underwritten in Dublin. This success was not based on the joys of the Irish weather. It was rooted in the happy absence of regulation.

Ireland, on the one hand, piggybacked on European Union laws and standards, which provided companies setting up in Dublin with a secure protective framework in which to operate. On the other hand, it specialised in allowing those companies to do as they pleased. A remarkably open analysis by one of the leading Dublin business law firms, William Fry, written in 2004 to mark the fifteenth anniversary of the establishment of the IFSC, was upfront about this contradiction:

A look at the insurance and reinsurance sectors reveals that there is a great paradox surrounding the legal and regulatory landscape. On the one hand, it was the existence of a comprehensive legal framework in the form of the three generations of [European Union legislation on insurance] that fostered the growth of these sectors. On the other hand, the reinsurance sector thrived because the relative absence of legislation meant that reinsurers could establish in the IFSC without having to concern themselves about solvency margins, asset admissibility rules and authorisation delays . . . the reinsurance sector thrived in the IFSC partly because of the absence of regulation, which allows reinsurance operations to establish quickly and without incurring high costs. The absence of any regulation regarding the solvency margins to be maintained by reinsurers or the admissibility of assets provided a fertile environment for the growth of both the captive sector and the establishment of innovative coverage providers . . . a pure reinsurer established in Ireland is free to provide reinsurance to insurers in any other Member States of the EU, notwithstanding that there is no system of prior authorisation or ongoing supervision of such reinsurers. The Insurance Act 2000 continued (albeit on a more formal basis) the ‘approval but no supervision’ regime. The [Act] also permits the Irish Financial Services Authority to direct a reinsurance operation to cease writing business in certain stated circumstances. We are not aware that this ‘nuclear option’ has ever in fact been exercised, however, these powers represent a necessary safeguard for the regulator, because once established there is virtually no ongoing supervision of reinsurance operations.

When the New York Times reported in 2005 that ‘Dublin has become known in the insurance industry as something of the Wild West of European finance’, it was not exaggerating. The IFSC was a lawless frontier town in which the spoils of the reinsurance trade were up for grabs and the sheriff walked only on the sunny side of the street, tipping his hat to the decent folks and avoiding the gaze of the desperados. And the baddest outlaw was John Houldsworth.

Houldsworth first came to notice with his contribution to the largest single bankruptcy in Australian history, the collapse in March 2001 of the HIH Insurance Group. HIH had purchased its apparently profitable rival FAI in 1999. It turned out that FAI’s profits were fictional. The company had been kept afloat through a series of reinsurance contracts, the most important of which was with General Re. It had been engineered in Dublin by Houldsworth. He and his colleagues worked a bit of fiscal magic to make FAI seem much more solvent than it was. According to the Australian Royal Commission of Inquiry that examined the scandal: ‘a wide array of practices were employed to achieve these ends, among them the use of side letters setting out arrangements that negated the transfer of risk, the backdating of documents, the inclusions of sections of cover not intended to be called upon and the use of “triggers” for additional cover that were unrealistic. The word audacious comes to mind.’ A Royal Commission source explained to Justin O’Brien, professor of corporate governance at Queensland University of Technology, that those who constructed the deal were ‘skilful interior designers’ papering over, not just cracks, but ‘gaping holes’.

As a result of the scandal, Houldsworth and another Dublin-based executive of General Re, Tore Ellingson, were barred from the Australian securities and insurance industries for life. Houldsworth was not prosecuted because he refused to travel to Australia for a legal hearing. The Australian authorities did, however, inform the Irish regulator of the outcome of their investigations. This was the equivalent of the Medical Council in one country warning another jurisdiction that it had struck off a doctor for malpractice. The obvious imperative was to stop Houldsworth working in Dublin. The Irish authorities chose to do nothing.

In late 2000 and early 2001, predictably enough, Houldsworth and his Alternative Solutions Group in Dublin were at the centre of another scam. This time, it involved General Re and the largest US insurer, American Insurance Group (AIG). AIG had a problem with the declining level of its loss reserves - the money it stored away in case of a catastrophe. Concerns about the problem led to a sharp fall in its share price after the release of quarterly results in October 2000.

AIG was General Re’s biggest customer. When AIG’s chief executive Hank Greenberg approached his opposite number at General Re, the outlines of a solution were agreed. General Re would take out $500 million worth of ‘insurance’ with AIG against future earnings decline. The ‘insurance’, however, was to be purely fictional. There would be no premiums and no transfer of risk. The point was simply to deceive AIG’s investors by making its books look $500 million better.

They knew where to look for the engineering of this scam: to the ‘audacious’ Houldsworth in Dublin’s Dodge City. In any well-regulated environment, the whole transaction would have raised immediate suspicions. With any scrutiny, the scheme would have revealed itself to be bogus simply because there was no premium being paid. As the then attorney general of New York, Eliot Spitzer, put it in his subsequent indictment: ‘GenRe did not pay premiums. And in fact AIG did not reinsure genuine risk. To the contrary, AIG paid General Re US$5 million, and the only genuine service performed by either party was that General Re created false and misleading documentation to satisfy Greenberg’s illicit goals.’ Or as Houldsworth was recorded as saying in a phone call to General Re in the US: ‘If there’s enough pressure on their end, they’ll find ways to cook the books, won’t they?’

The US Securities and Exchange Commission was damningly clear in its interpretation of what had happened: ‘This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator company (General Re) to aid and abet senior management of an issuer (AIG) in structuring transactions, having no economic substance, that were designed solely for the unlawful purpose of achieving a specific, and false, accounting effect on the issuer’s financial statements.’

The Irish regulators had nothing at all to say about the case. The judge who sentenced Houldsworth and the others in the US remarked that ‘if fraud is contemplated . . . these people will know that they will be investigated and prosecuted for their involvement’. In Ireland ‘these people’ continued to know that the likelihood would be that they would not be caught and that, if they were, the worst that might befall them would be an embarrassed silence.

Particularly after Houldsworth pleaded guilty in 2005, there were ominous signs that the scandals were doing real harm to Ireland’s international reputation. The normally supportive International Monetary Fund began to make noises about the laxity of regulation in the Dublin reinsurance market. Justin O’Brien highlighted the IFSC’s place in the Houldsworth scams in an article in the Australian Journal of Corporate Law and in a number of prescient pieces in the Irish Times. O’Brien warned that the scandals ‘severely compromise the reputation of Ireland as an emergent financial services centre’. He quoted ‘off-the-record briefings provided to the author by senior regulators in Australia and the United States throughout August 2005’. One expressed ‘shock and dismay that Ireland had abdicated its responsibilities for short-term advantage’. Another said, ‘good luck to Ireland if it thinks it is going to get away with it, but it won’t’.

The essential reaction of the Irish regulators, however, was denial. After the Australian authorities banned Houldsworth and Ellingson in 2004, the Regulator did nothing about the fact that they were still employed at Cologne Re in Dublin. In March 2005, when the AIG scam had already come to light, it publicly endorsed this state of affairs, claiming that Cologne Re had taken ‘corrective action’ in relation to the pair. On the one hand, said the Regulator’s official spokesman, the authority was not empowered to take action against anyone except company directors. On the other hand, it claimed that in any case ‘We are satisfied with the corrective actions in relation to these individuals that have been taken to date by Cologne Re and we will continue to actively monitor the situation.’ He was unwilling or unable to say what that ‘corrective action’ was.

A few months later, the Regulator’s chief executive Liam O’Reilly gave an interview to the Irish Times in which he said: ‘We will never get rid of original sin. We all fall down at times. We are not in the business to make sure everyone who falls is punished. It is our job to make sure there are appropriate systems, processes and procedures in place.’ He went on to imply that the Regulator had known about Houldsworth’s ‘audacious’ adventures in Australia for a long time and had in fact acted to stop his activities in Dublin: ‘There was an implication in the media that we were caught by surprise,’ O’Reilly said. ‘We knew about the issue well before it hit the papers. We were talking to regulators in Australia and the entity here. We had ensured these individuals were not in positions of power here. We are happy we dealt with it appropriately.’ This was simply untrue: Houldsworth had been in a sufficient position of power to co-engineer a $500 million fraud.

The 2004 Finance Act contained incentives to encourage treasury management groups to locate even more of their activities in Dublin. As Christine Kelly, tax adviser to the IDA, explained to potential clients, the hope was that more corporations could ‘benefit from the alignment of business and tax objectives . . . For example, in the treasury sector there are opportunities arising from the potential to convert treasury operations into combined holding and financing operations. The location of both functions in the same jurisdiction offers accounting, tax and legal efficiencies in the redeployment and repatriation of surplus cash around an international group.’

One of the fruits of this strategy was the attraction, in 2009, of Australia’s most despised company, the construction materials giant James Hardie. The company’s fortune was founded on asbestos mining, leaving it with a huge overhang of compensation claims from sick miners. James Hardie dealt with this embarrassment by skipping off to domicile itself in Holland, leaving two small subsidiaries to deal with the compensation payments. These companies had assets of A$180 million, compared to a likely cost of asbestos-related claims estimated by a special commission of inquiry at A$1.5 billion. The ‘singularly unattractive’ idea, as the commission put it, was that ‘the holding company would make the cheapest provision thought “marketable” in respect of those liabilities so that it could go off to pursue its other more lucrative interests insulated from those liabilities’.

James Hardie’s spinning of the truth in relation to this shortfall was referred to by the commission as a ‘culture of denial’. The commission remarked that ‘for nearly thirty years in this country we have had standards for business communications. Such communications are not to be misleading or deceptive . . . In my opinion they were not here observed.’ In 2007, the Australian Securities and Investments Commission commenced civil proceedings against a number of current and former James Hardie directors, and sought declarations that the company had ‘made misleading statements and contravened continuous disclosure requirements’.

In 2009, James Hardie decided that it would feel right at home in Ireland. In its statement to shareholders on the proposed move of its HQ to Dublin, it pointed to the irritation that Dutch law imposed ‘the requirement for key senior managers to spend substantial time in the Netherlands away from key markets and operations in order to qualify for US/Netherlands tax treaty benefits’. In facilitating global corporate tax avoidance, the Dutch expected those corporations to observe the niceties of actually pretending to be operating from the Netherlands. The Irish required no such pretence. Besides, as the prospectus put it, the move ‘increases the company’s flexibility by allowing certain types of transactions under Irish law’. As seasoned practitioners of the ‘culture of denial’, James Hardie would be a fitting addition to the Potemkin village on the Liffey.

At the IFSC annual lunch in December 2005, the first formal occasion for political comment after Houldsworth’s guilty plea, the Minister for Enterprise, Micheál Martin, said nothing about the scandals but instead noted the ‘unhappiness in the business sector at the degree and extent of obligations imposed by directors’ compliance statement obligations’. He boasted that he was changing these regulations to ensure that the law would be ‘less prescriptive about the methods a company uses to review its compliance procedures, and in not requiring review of the compliance statement by an external auditor’.

Even more importantly, Charlie McCreevy, now the EU Internal Markets commissioner, with responsibility for financial regulation, stood firmly by the idea of ‘principles based’ regulation in which everyone agrees to nice ethical codes (not specific rules) and it is up to company boards (not external supervisors) to enforce them. He told the German-Irish Chamber of Commerce that ‘There is a temptation at national level to “gold-plate” rules and regulations, which only serve to impede the market without delivering effective assurances for consumers. This is a temptation we all need to resist . . . What Europe needs is a well-regulated but not over-regulated financial system.’

He then launched into a paean to the virtues of letting it all hang out and the evils of regulation:

My political philosophy is based on giving people freedom. That includes freedom to make money and freedom to lose it. Freedom to make mistakes and to learn from them. Freedom to equip yourself with the knowledge you need to buy a financial product and freedom to ‘buy it on the blind’. These freedoms have to be exercised within the framework of laws that are fair and that are proportionate, laws that punish mis-sellers and wrongdoers - and punish them hard - but not within a framework that is stifling, disproportionate, or that destroys the motivation to innovate . . . Many of us in this room are from the generations that had the luck to grow up before governments got working and lawyers got rich on regulating our lives. We were part of the ‘unregulated generation’ - the generation that has produced some of the best risk takers, problem solvers, and inventors. We had freedom, failure, success and responsibility and we learnt how to deal with them all . . . Don’t try to protect everyone from every possible accident.

McCreevy and many of his listeners were indeed from the ‘unregulated generation’ that had planted the flag of freedom from Dublin to the Cayman Islands before boldly going into the uncharted virtual territories of ghost banks and brass-plate companies. They had seen plenty of innovation and invention, as people thought up new ways to evade their taxes or shift billions through the ether. They had seen plenty of ‘mistakes’ and ‘accidents’. All they lacked was the slightest ability to learn from them.

In spite of four major scandals involving criminal behaviour (DIRT, Ansbacher, Parmalat and Cologne Re), there was no sense that the political and regulatory systems ought to regard the financial industry with a sharp eye and at a cool distance. Socially, culturally and ideologically, there was a shared set of assumptions and values that made it very easy to move from one side of the fence to the other. The borders between politicians and bankers, regulators and regulated became ever more porous.

The Fianna Fáil stalwart and former Minister for Foreign Affairs David Andrews is chairman of the board of AIG Europe, which made political contributions to his son Barry. The Irish Bankers Federation is headed by the former Fianna Fáil general secretary Pat Farrell. Liam O’Reilly went from being chief executive of the Financial Regulator to being a member of the boards of Merrill Lynch International Bank and of Irish Life and Permanent. While holding these banking positions, O’Reilly was still chairman of the Chartered Accountants Regulatory Board. ‘Liam’s long experience in financial services, public administration and economic and monetary policy in Ireland and at EU level will be invaluable, ’ Irish Life’s chairperson Gillian Bowler explained on his appointment. On joining Merrill Lynch, O’Reilly explained that ‘Merrill Lynch asked me to join with good motives. It was to make sure that they were doing things right. I would be like a watchdog for them inside.’ His bark seems to have been as gentle as his bite had been when he was a regulator. In February 2009, Merrill Lynch announced that the Dublin-based operation may have had a rogue trader on its books, costing it up to $120 million.

Paddy Teahon, former secretary general of the Department of the Taoiseach, and one of the most influential civil servants of the entire Celtic Tiger period, was also a director of Merrill Lynch’s IFSC operation and of the huge property development company Treasury Holdings. Paul Haran, former secretary general of the Department of Enterprise, Trade and Employment, is a director of Bank of Ireland, which paid him €122,000 in 2008 and €119,000 in 2009.

Adrian Byrne, who had raised suspicions about the Ansbacher scam back in the 1970s, and then became head of banking supervision at the Central Bank (and, until 2005, personal adviser to the chief executive of the Financial Regulator) is a director of the IFSC-based West LB Covered Bond Bank Plc. He is also a director of Intrinsic Value Investors Umbrella Fund Plc, an investment fund administered by State Street Fund Services, based at the IFSC. Maurice O’Connell, who was a senior figure at the Department of Finance during the bank scandals of the 1980s and then became the governor of the Central Bank, is a director of Defpa Bank at the IFSC. There is no suggestion that any of these men behaved in any way unethically or that they were ever less than diligent in performing their duties. The point, simply, is that no one moving between the worlds of supervision and active banking was likely to suffer from culture shock.

Perhaps the most vivid illustration of the ease with which regulators could move from one side of the fence to the other is the career of William Slattery, whose prescient warnings about the level of debt in the Irish economy were quoted in Chapter 5. He joined the Central Bank in the late 1970s and was directly responsible for the supervision of the IFSC from its inception in 1987 until 1995. He became deputy head of banking supervision, with hands-on responsibility for the regulation of all the banks and building societies. In 1996, less than a year after he left this position, he joined Deutsche International Ireland, an Irish subsidiary of the German bank, dedicated to servicing hedge funds, derivative funds and other offshore operations. From there, he became head of the Irish division of the US financial services holding company State Street, and of its European Offshore Domiciles division.

Most remarkably, Slattery also chaired, from 2002 to 2005, the bankers’ lobby group Financial Services Ireland (FSI). In that role, he was at the forefront of the fight against nasty regulators like William Slattery in his previous incarnation. At the annual dinner of FSI in the opulent Four Seasons Hotel in Ballsbridge in 2003, he complained to his fellow bankers that ‘I regret to say that there is a palpable sense of unease within the financial sector in Ireland about what is becoming an over-regulated business environment. There has been a dramatic increase in the regulation of our economy in recent years. In public debate in Ireland, more regulation is regarded as good, and, increasingly, regulation is regarded as a panacea for all sorts of public policy issues . . . I believe that the sheer extent and complexity of regulation in recent years has damaged the competitiveness of the economy. I believe that the expectations of politicians, the media and the public, regarding the beneficial impact of regulation, are exaggerated.’

With such antipathy to regulation even from the former regulator of the IFSC, it is not surprising that Irish-based financial companies played a large part in the global banking crisis that unfolded in 2007 and 2008. Bear Stearns, one of the biggest institutions to collapse in the credit crunch, had two investment funds and six debt securities listed on the Irish Stock Exchange, and it operated three subsidiaries in the IFSC, through a holding company, Bear Stearns Ireland Ltd.

Jim Stewart identified nineteen funds caught up in the subprime crisis and located at the IFSC. Four German banks with funds quoted in Dublin were caught up in the crisis - Bayern LB, IKB Bank, Sachsen LB and West LB. IKB Bank took losses of €2 billion from an off-balance-sheet conduit called Rhineland Plc with funds quoted in Dublin. The German government had to bail it out to the tune of €7.8 billion. Sachsen bank required emergency funding of €17.3 billion because of ‘liquidity difficulties’ with its Dublin-based subprime funds, with the cute local names of Ormond Quay and Georges Quay. As early as 2004, the German financial regulator had warned its Irish counterpart that these funds were engaging in risky and murky investment practices, including on the US subprime market, but the Irish essentially disavowed all responsibility for monitoring them.

Depfa Bank, with Maurice O’Connell on its board, nearly caused its very own catastrophe for the Irish taxpayer. It was, as we have seen, officially an Irish bank, with its global HQ in Dublin. In theory, it was an ultra-safe institution, lending money to public sector clients in the developed world. In practice, it was funding much of this long-term lending with short-term borrowing on the money markets. When those markets dried up after the collapse of Lehman Brothers in September 2008, Depfa teetered towards collapse. It was pure luck (for the Irish) that Depfa had been taken over in September 2007 by the German commercial property lender Hypo Real Estate. Depfa’s implosion triggered the collapse of Hypo, ultimately costing the German taxpayer over €100 billion in guarantees and credit lines. If Hypo had not taken over Depfa twelve months before the collapse, the problem would have belonged exclusively to little old Ireland. The havoc that the Bermuda of Europe had created for the rest of the continent would have been wreaked on Depfa’s island home.