Open Dissent (2 page)

For comparative purposes, where the norm for lending in the Eurozone was just over 100 per cent of gross domestic product (GDP), Ireland's bank lending had soared to 200+ per cent of gross national product (GNP) (see
Figure 1
in the
Appendix
). By the end of 2008, the Irish banks were lending vast amounts to property developers and residential mortgagees. The growth in credit relative to GDP created all sorts of distortions in the economy, none greater than the price of houses. The growth in property prices can be viewed from the perspective of increased demand resulting from the increase in population and the low interest levels associated with the euro. Bubbles grow when buyers are motivated by the availability of credit and the hope and expectation that prices will continue to increase. When this spiral of borrowing and increasing prices starts to work in reverse, a problem is created. This would be manageable if it took the form of a slow leak to the bubble, but if there is an edge to
this reversal, and this edge is the realisation that prices have peaked, the result is a pricked bubble. As wholesale funding grew to proportions that had not been seen before, the banks became more and more dependent on the rolling over of their wholesale deposits, mostly international short-term deposits, to keep their books in balance.

Common sense would suggest that the combination of easily available mortgages and comparatively low interest rates would create an enormous demand for property. In a developed country the construction sector would normally account for approximately 5 per cent of GDP. The combined contribution of this sector grew to approximately 21 per cent at the peak of the bubble in 2006–2007.
²
Those who had property wanted more, those not yet on the property ladder were assisted by their parents and many, many more just wanted a piece of the action that would hopefully create a nest egg for retirement. The number of second homes in Ireland, i.e. not including holiday homes abroad, amounted to some 300,000 units. This figure presumes that every unit was accounted for in the €60 million raised by the Revenue Commissioners in property tax on second homes in 2009, which, no doubt, wasn't the case.

The side effects of the downturn forced people to reevaluate where they stood financially with their bankers or fellow investors. Negative equity was an unwelcome visitor into people's homes and investment properties. How did some of these people get to own five, ten, fifteen or even more properties? Take the case of a hard-working public servant who, during the period of prosperity and
growth, managed to put a portfolio of properties together that had a market value of €12 million with loans backing these properties of €8 million. This individual was on an annual income in the region of €75,000. One can understand the state of elation when a person manages to acquire a home for each child in the family and in a buoyant market where the value increases every day. However, the downturn came and, instead of being left with a net worth of €4 million, this public servant was potentially bankrupt.
³

There are similarities between the conditions that existed in property lending, which caused the property bubble in Ireland, and the sovereign debt crisis that we in Europe are faced with today. The principles of lending are the same for every borrower: the lender or investor demands to be repaid in line with the terms of the loan agreement. Many Irish developers are only too aware of this. European sovereign borrowers, who are now either unable or unwilling to repay their loans, face consequences for their economic and political sovereignty. At the moment the money that has been lent by the surplus nations to the deficit nations in Europe is counted by the Bank of International Settlements in US$ trillions. Running deficits have been universally accepted as an economic imperative of consumer-driven expansion or recovery. The concern that now permeates the markets is whether repayment of debts is a realistic part of today's economic equation for growth. The growth of the sovereign debt mountain must be addressed sooner rather than later. Can the debtor nations repay all their current outstanding debt within five, ten, twenty or even fifty
years? Should part or all of existing debt be converted into some form of perpetual debt that will ease the burden of repayment? The crisis in Ireland is being magnified as the bank borrowings and sovereign borrowings of the country converge, creating one enormous problem for the state. This is not to suggest that there should be no further borrowings by sovereigns, but would it be too much to ask of governments to adopt the financial discipline they expect of their citizens?

Financial crises have the capacity to magnify the weakest links in the leadership of financial institutions. In my working life, I not only enjoyed a diversified career in financial services, but also a global perspective of the financial markets and the privilege of working directly or indirectly for four remarkable leaders. I not only got to see the strengths and weaknesses of these leaders through daily contact with them, but I also had the experience of seeing them in action and the wisdom of their decision making.

As I look back on my own career in the context of the current crisis, I am struck by the failures that occurred in succession planning in the four major institutions that I have worked for internationally and in Ireland. This issue of succession and leadership is the thread linking Walter Wriston (Citicorp/Citibank, New York), Richard (Dick) Flamson (Security Pacific, California), Donald (Don) Argus (National Australia Bank, Melbourne) and Laurence Crowley (Bank of Ireland, Dublin). Using these four men and these institutions as examples, I wish to describe a
common occurrence that may illuminate the machinations of identification and appointment of successors in corporate life, which may in turn provide an insight for those who ask the question, in the context of the current financial crisis, ‘What went wrong?'

The first of these leaders was Walter Wriston, chairman and CEO of Citicorp/Citibank (later Citigroup) in the US, which was at one point the largest bank in the world in terms of financial assets. Wriston was very much the doyen of banking and was held in the highest regard by Government, customers, employees, shareholders and, above all, his competitors. He was very much a cerebral visionary. In his fifteen-year term at the helm of Citicorp/Citibank, the organisation grew to be the largest international bank in the world, with a presence in over one hundred countries by the time of his retirement in 1984. His vision of creating a massive international financial services organisation with an equally strong US domestic banking franchise was achieved during his term of office. It was not without its challenges and failures but, in the end, as the reins of the organisation were handed over to John Reed, Citicorp/Citibank could boast of having an established domestic and international presence in both consumer and wholesale corporate banking.

Globalisation was accelerated under the new leadership. The desire of John Reed to grow a massive diversified financial services company – including an investment banking arm and insurance business through the acquisition of Solomon Brothers and a merger with Travelers
Insurance Company – came about after the 1987 amendment to the Glass–Steagall Act of 1933 (see
Chapter 1
). The conflicts that occurred due to the difficulty of integrating these various activities resulted in the retirement of John Reed, who was joint head of the institution with Sandy Weill, in 2000. Whatever the differences in style of leadership of the two senior directors, as perceived by the Citicorp board, it was Sandy Weill who survived. The extraordinary growth of this institution over the next seven or eight years resulted in the US Government having to bail out the bank at the onset of the US financial crisis in September 2008. Weill was succeeded by Vikram Pandit in December 2007.

I joined Security Pacific in London in 1985 to set up an international merchant bank. I saw the organisation grow from 2 executives with a small presence in the UK to 3,700 staff in both the debt and equity capital markets, with a presence in 11 financial centres around the world, including New York, London, Frankfurt, Tokyo, Geneva and Sydney. CEO Dick Flamson had a vision at that time which was based on both organic growth and acquisitions. Major brokerage operations in the UK (Hoare Govett), Canada (Burns Fry), New York, Sydney, Tokyo and Frankfurt were identified to complete a global presence. The objective was to create a debt and equity securities capability in each of the major financial centres of the world, thus creating global reach. The challenges were basically twofold: management of cultural differences between major US commercial banks and local foreign brokers in each of the countries, together with the need for substantial
capital allocations and strong internal governance for these diverse entities. As in the case of Walter Wriston and Citigroup, when Dick Flamson was ready to hand over the reins of the organisation he did so to an individual in the Security Pacific mould who had come out of the operations and processing side of the bank. His name was Robert (Bob) Smith. His background was domestic US banking with a strong emphasis on operations. The complexities of the capital markets internationally and domestically would lead to the undoing of the global vision. Security Pacific was taken over by Bank of America in 1992 as a result of the poor execution of an acquisition of a major residential property portfolio in Arizona. The suitability of Bob Smith for the role of Flamson's successor was in question from the outset, but the capital and balance sheet challenges that ensued were far too much for the new team to manage. Again, here was a succession plan that appeared set for failure from the beginning.

In 1994 I had the good fortune to join National Australia Bank (NAB) in London with the mandate to develop a profitable wholesale business in the UK and Europe, similar to what I had achieved with Security Pacific but not on the same scale. It was a privilege for me to be appointed to the executive committee of NAB in Melbourne in 1998. Don Argus was the CEO of NAB at the time.

Under Argus's leadership, NAB expanded internationally over time, with the key focus on retail banking. Over several years of expansion, the group had an established presence outside of Australia in England, Ireland, Scotland,
Northern Ireland, the US and New Zealand. Argus's presence was felt throughout the organisation. Here, again, was a fine leader who would prove to be difficult, if not impossible, to replace. By 1999, Argus had decided to move on and was faced with a succession decision. While the proof of Argus's greatness is reflected in his subsequent appointment as chairman of BHP, which became BHP Billiton – the largest mining and resource company in the world – the fate of his beloved NAB was placed in the hands of Frank Cicutto, a NAB employee all his life, who was best described as a credit specialist within the Australian empire. NAB had enjoyed the status of premier bank under Argus for many years but the challenges that beset his successor were enough to see this great institution relegated in the financial league tables. There is an opportunity for a turnaround by the new management team today as the share price currently flounders at levels last experienced some nine years ago.

Another interesting aspect of my time on the executive committee in NAB in Melbourne was the composition of the committee itself. Fred Goodwin, a relatively unknown banker in 1997, was a senior executive on this committee, having spent the previous couple of years as CEO of Clydesdale Bank, a subsidiary of NAB. Fred departed NAB in 1999 when he became deputy chief executive of Royal Bank of Scotland, where he was credited as being the driving force behind the successful takeover of National Westminster Bank in 2002. Fred subsequently became chief executive of Royal Bank of Scotland and was knighted a
couple of years later. This bank grew organically and, at Fred's insistence, through acquisition of parts of ABN/AMRO. This acquisition was opposed by many investors and analysts and was the straw that broke the camel's back. Sir Fred Goodwin, after the crash in late 2008, became the most vilified banker in the UK. Fred believed, in business career terms, that he was in a class of his own. There are few who might argue with that self-assessment today. Anyone who worked with him will know he was an intelligent executive with a strong technical skill base and a single-minded attitude to match. Who in the succession planning process in the Royal Bank of Scotland could have recognised the weaknesses that led to the demise of this great institution under Fred's leadership? Were there any tell-tale signs that were overlooked in the process?

I was fortunate to have Laurence Crowley as Governor (chairman) of Bank of Ireland when I was appointed in 2002 as CEO of the bank. Laurence Crowley had earned a reputation for integrity, good judgment and equally good leadership in Ireland. As an outsider, it was hoped that I could bring change to an organisation that had been founded in 1783 and had developed a strong culture of integrity, respectfulness and industriousness, draped in an Irish flag.

A genuine icon, Bank of Ireland was respected locally and well regarded by regulators and competitors. Innovation was not high on the agenda and a culture of entitlement prevailed. Rank had its privileges. The obligation of earning rather than being entitled was lost in the hundreds of years
of institutionalisation within the bank. A fear of change prevailed. What got the bank to where it was in iconic, if not financial, terms was believed to be sufficient. Openly challenging the status quo was not always acceptable as it appeared to reflect disrespect for the past, which had made the institution what it was. I introduced cost management programmes early in my tenure, which fundamentally put the freedom of choice in terms of cars, travel and incidental expenses back into the hands of the employees. This was not met with enthusiasm as the culture of entitlement was ever comforting.

Again, in the arena of succession planning, with my sudden departure from Bank of Ireland in 2004 after some two years and eight months at the helm, I am left wondering to this day as to what is the level of preparedness needed from a board's perspective to ensure an uncomplicated transition at chief executive level. In the interest of protecting this great institution that I had come to admire, I was faced with an incredible dilemma when information pertaining to access to an adult website by myself was released to the
Sunday Business Post
on the last weekend in May 2004. I made the only decision I could in order to protect the reputation of the institution. The release of this information occurred some 8 weeks after 500 technology jobs in the bank were outsourced to Hewlett Packard. To this day I do not know where the leak sprung from. In my judgment, no personal reputation was worth the effects the potential salacious coverage of this story might have had on the corporate reputation of Ireland's financial icon. That
being the case, considering the time pressures, the Court (board) had few options. The obvious internal candidate for succession was Brian Goggin; an external search was unlikely to identify a better candidate. He was the most experienced internal candidate and was viewed as a safe pair of hands in this time of turmoil, since I had departed the bank instantly. In the interests of corporate performance, no CEO deserves to pay the price, in terms of health, that Brian Goggin has.