Each year the standard boiler-plate material included in annual reports of Anglo Irish Bank concerning directors' loans went as follows: "Loans to directors are made in the ordinary course of business on commercial terms in accordance with established policy."
The loans to directors may have been extended in the "ordinary course" of business, but we have learned over the last six months that these were no ordinary loans and the borrowers were no ordinary directors.
The first pattern that makes Anglo's directors' loans so different to anything one would associate with "the ordinary course of business" is the sheer scale of them.
The Sunday Tribune first reported on 21 December that directors' loans at Anglo were the highest in Europe, when measured against other large lenders in the market.
Based on figures in the 2007 annual report – before news of Sean FitzPatrick's loans broke – directors of the bank were re-paying loans worth on average €3.5m each. Key management personnel had loan balances outstanding of €1.2m each, although this has been hugely revised upward in the last few months following the appearance at an Oireachtas hearing by Anglo's chairman Donal O'Connor.
The ratios do not mean that individual directors or executives borrowed these precise sums, but the ratios do give a sense of the scale of borrowing by connected parties that Anglo Irish Bank was prepared to permit.
The only other bank where average directors' loans exceeded €2m each last year was HSBC Plc, which is one of the world's largest banks with a market capitalisation of €122bn. The directors' loans of other big European players are modest, with those banks opting instead to reward employees and directors with share options, not directors' loans.
Average directors' loans at several other leading banks were smaller than many Irish mortgages. Directors at Spanish bank Santander owed their company an average of €326,086, while those at Deutsche Bank owed just €133,333, according to their respective annual reports.
For some reason, which has never been properly explained, Anglo seemed to have a curiously generous approach to directors' loans. This is all the stranger when one considers how generously Anglo directors were remunerated during the Tiger years.
In a large amount of cases directors and key managers borrowed the money to purchase stakes in property investments that have since gone sour.
Unfortunately from a taxpayer perspective, often these loans were not recourse to the borrower, although sometimes they were recourse to the actual property investment itself.
However, where an Anglo borrower is just one member of a wider syndicate, it will presumably be difficult for the government – via Anglo Irish – to seize as collateral anything other than a small share of a syndicate.
If the other syndicate partners are forced to purchase the shares originally owned by the Anglo borrower, it may not be at the bubble-era prices, but at today's far lower prices. This will all depend on the terms of the syndicate.
Much public focus remains on how Sean FitzPatrick, the ex-chairman, will be able to discharge his €106.8m of director's loans. These loans were advanced at "commercial interest rates" on a "secured basis" and with "full personal recourse'' according to filings by Anglo Irish Bank. If those conditions remain in place, there is nothing stopping the bank from seeking a judgement against FitzPatrick if he is not paying back his loans. However what is not known at this stage is what these loans were secured upon, apart from Anglo shares which have virtually no value at this point.
While FitzPatrick may still face the wrath of Anglo and the government over his loans, other directors and former directors are more than happy to hide in his shadow.
These are just some of the other loans outstanding:
• A former director has €8m outstanding and the bank has "full personal recourse" on this amount.
• Two former directors have loans of €6m outstanding in relation to investment partnerships they have participated in. The directors are personally "liable" for the loans.
• Another loan of €4m to a former director who is participating in an investment partnership is also outstanding. Anglo is entitled to a share of this investment if the loan is not repaid and the interest on the loan. But according to the company, the actual principle on the loan is not recourse to the borrower.
• Another former director has €17m outstanding in relation to his investment in certain "co investment structures''. These loans are secured against the investments, but there is no further personal recourse to this director.
Managers at the bank also have issues in relation to loans. The Irish Times reported recently that eight senior managers have loans ranging from €835,000 to €7.1m with the bank. The paper claimed the long-standing managers had a total of €21.9m outstanding as of September 2008.
Most bizarre of all considering the public controversy over the subject, Anglo has committed itself to lending another €5m to directors in the period ahead. These are known as "undrawn commitments" and it's possible that they will never be drawn, but legally the directors could seek the money to be paid out.
Meanwhile, senior executives at the bank like finance director Matt Moran and head of the Irish business Pat Whelan have refused to comment on the extent of their personal exposures.
Of course, there are also the loans which were given to 10 "long-standing clients" of the bank who took part in the notorious golden circle transaction which kept about 10% of the bank's shares off the open market. The bank has already set aside €308m for this purpose.
The bank has also set aside €31m for the FitzPatrick loans and other loans to former directors. However, if FitzPatrick was no longer paying any interest this provision may prove totally inadequate, at least until security has been taken and offset against the value of the loan.
John Gormley, a Green Party minister, said last week FitzPatrick would be pursued for every penny of his debt, but the adequacy of the security underlying the loans is the crucial concern here, not the vigour of the pursuit. Property is the most likely security attaching to the loans and these assets are likely to be hard to value and may have to be sold at firesale prices, forcing the taxpayer to be out of pocket.
All of these issues are described by Anglo chairman Donal O'Connor as "legacy matters". But for the Department of Finance, which now owns the bank, they are live and highly sensitive issues in two key respects.
One is how hard does the Department of Finance – via Anglo – pursue those ex-directors who may be in default on their loans, including FitzPatrick.
Secondly, what about existing executives at the bank who may or may not be in default on their loans. If they are in default can the government really allow them to continue in office at Anglo? If the government cannot allow them to remain in office, how does it propose to remove them?
Crucially, senior managers at Anglo Irish Bank who have loans in arrears with the bank are in danger of being judged unsuitable to hold their positions under the Financial Regulator's "fit and proper" code.
It is understood the board may at some point inform the regulator that some senior personnel, because they are carrying significant impaired loans drawn from the bank, could be in violation of the financial soundness provision in the code and would therefore be unfit to remain in their jobs.
The fit and proper standard states that bank directors and senior managers who fail to manage their financial affairs satisfactorily can be denied permission by the regulator to continue in their roles due to "doubt" about their "honesty and integrity".
Nobody is suggesting any current senior managers are actually in this position, but if they were, it would be a very serious matter.
Unfortunately for the taxpayer, who now owns the bank, the flow of information on these important issues is scant, except for the occasional media disclosure.
Last week the bank changed its reporting period and instead of its financial reporting period ending in September, it will now reach to December 2009.
That means a profit and loss account and balance sheet will not issue until March 2010 at the earliest. This gives everyone, the minister and the bank, an opportunity to clean up the mess behind closed doors. Unfortunately it does not give the taxpayer any opportunity to see just how the mess is being cleaned up.
Prospect of a purge
Department of Finance officials have discussed additional management changes at Anglo Irish Bank in recent months, beyond those which took place following the departures of Sean FitzPatrick and David Drumm.
However, a decision has been made that the department will not seek the removal of any senior office holders until enquiries about a range of issues at the bank have concluded. The view has been taken that incoming chief executive Mike Aynsley will need the support of the existing management for some time.
But the government takes the view that ultimately a wider act of management purging will be needed at some point if the institution is to be fully stabilised.
Several senior executives have left the bank in recent weeks, with one leaving for Royal Bank of Scotland, while two others have been interviewed at Barclays' Irish operation.
'Financial Soundness' Issue
To serve as a senior manager or director of an Irish bank or building society the person involved must possess what is called "financial soundness''. While this requirement arises when the person is first appointed to their post, it is an "ongoing" requirement, according to the Financial Regulator.
In a document released last December by the regulator the following comment was included under financial soundness provisions. "Where a person has failed to manage his or her debts of financial affairs satisfactorily, especially where that caused loss to others, the person's competence, honesty and integrity may be in doubt.''
Those serving at the top tier of Irish banking must complete a reputation and character questionnaire for the regulator upon appointment and banks are required to inform the regulator of any major changes to the position of the post holder.
The questionnaire asks respondents whether they have been – at any time – declared bankrupt or entered into arrangements relating to insolvency. The respondents are also asked whether they are currently the subject of bankruptcy proceedings. They are also asked whether they are aware of any pending proceedings, and whether they've failed to satisfy a judgement debt made under a court order. It is not automatic that an incident in someone's past immediately rules them out of holding a senior position.
"However it is important for the Financial Regulator to be aware of such instances in the past so that it can have confidence in the fit and proper test in the face of information coming from members of the public, or from other sources," the guidelines say.
Anglo Irish Bank has refused to comment on whether any serving managers are in compliance with the requirements or not. The Financial Regulator has also refused to comment on the issue in relation to Anglo Irish Bank specifically.