An accountancy expert has told an alleged market deception trial that he believes a circular €7.2bn deal between two banks could have gone on forever.
Four former senior bankers from Anglo Irish Bank and Irish Life and Permanent (ILP) are on trial for allegedly conspiring to mislead investors by setting up a €7.2bn circular transaction scheme to bolster Anglo's 2008 balance sheet.
Peter Fitzpatrick (63) of Convent Lane, Portmarnock, Dublin, John Bowe (52) from Glasnevin, Dublin, Willie McAteer (65) of Greenrath, Tipperary Town, Co Tipperary and Denis Casey (56), from Raheny, Dublin have all pleaded not guilty at Dublin Circuit Criminal Court to conspiring together and with others to mislead investors through financial transactions between 1 March and 30 September 2008.
On day 53 of the trial the State called Mark Hunt, a chartered accountant who has worked for the Bank of England and the UK's financial conduct authority.
Mr Hunt told Paul O'Higgins SC, prosecuting, that he examined all the evidence around the €7.2bn deal and the accounting treatment of it in Anglo's balance sheet.
He said he came to the conclusion that the deal had no commercial or economic substance, both of which are technical accounting terms.
He said the economic substance of a transaction was germane to how it was subsequently accounted for.
Mr Hunt said: "This is a very, very unusual series of transactions. It is not a series of transactions that is routinely entered into as part of [the bank's] normal routine balance sheet management activity."
He said that the transactions took the form of a series of paired transactions; a transaction between Anglo and ILP and a corresponding transaction between Anglo and ILP, acting as agent for the non-banking entity Irish Life Assurance (ILA).
"ILP on behalf of ILA paid the money back," he said. He said the transactions were circular and at no stage did Irish Life Assurance transfer money to Anglo before Anglo had transferred funds to ILP.
"These paired transactions could have gone forever. This could have gone on to 14 billion or 140 billion. There were no constraints on doing it," he said.
He told the jury that based on the view that the deal had no commercial substance the transactions should have been netted off in the accounts - meaning they would cancel each other out and not be included in the final figures for the bank's balance sheet.
"They should not have been there in the balance sheet assets or liabilities. Both would be €7.2bn smaller," Mr Hunt said.
Mr Hunt said that year end planning for a bank or any business was a normal thing.
"Most companies will have a look at their balance sheet and will try to undertake transactions that allow them re-profile their balance sheet," he said.
He said retailers, for example, often have 31 January as their year-end date so that they can sell stock and have a bigger cash figure on the year end accounts.
In terms of banking he said he had seen a number of initiatives over his career, including trying to generate customer deposits at year end by launching new saving products to attract depositors.
He said that balance sheet management was a legitimate pursuit but added that the Anglo/ILP deal in September 2008 was "a very, very unusual series of transactions".
Mr Hunt told the jury that a REPO transaction was part of normal balance sheet management where a bank converts one assets to a different asset which has a more attractive profile on the balance sheet.
"If a bank wanted to look more liquid and less long term it would sell a loan for some cash. One asset is exchanged for another asset with a back to back agreement that the owner will purchase it back," he said.
The transaction is short term and used to manage the balance sheet but it is constrained by the amount of assets which can be sold by the seller and the willingness of another entity to buy the assets.
Mr Hunt said he believed the objective of the September deal was to improve the "customer number"- the number showing the level of deposits from non-bank customers.
He said that customer deposits were described as "sticky" in banking because they were more reliable and long term than the short-term funding from the money markets.
"It takes a lot of customers to act in the same way to cause a drain on that figure," he said, adding that this is what happens in a run on the bank.
He said customer deposits were a key performance indicator which showed confidence in the bank and gave a strong message to the markets.
He told the jury that, counter-intuitively a bank regarded deposit of money as its liabilities and loans by the bank as its assets.
The trial continues before Judge Martin Nolan and a jury.
