John FitzGerald's four-hour appearance at the Oireachtas Banking Inquiry shone a light on how the ESRI, the country's main economic think-tank, goes about its business and on its interaction with government, which provides about 30 per cent of its budget.
He also gave an insight into the mindset of the top brass at AIB in 2006, which it seems had its own concerns about the Irish economy at that time.
In addition, the inquiry afforded FitzGerald the opportunity to publicly admit his mistakes in having missed all the flashing warning lights in the years leading up to the financial crash in the second half of 2008.
Having spent 30 years with the ESRI and more than a decade before that with the Department of Finance, it seems to pain FitzGerald that he didn’t see such a spectacular crash coming.
FitzGerald admitted that six weeks after the ESRI’s medium-term review was published in May 2008, the full horror of what was coming had dawned on him.
It is the policy of the ESRI to publish all of its research, and it wouldn’t countenance external meddling in its commentaries.
By and large, there was no political interference in his work. But he recounted a story of being in Warsaw in October 1999 when the director of the ESRI called him to say the Department of Finance was “jumping up and down” about a particular article from the ESRI that was about to be published.
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By the time he was back in Ireland, the article had been changed by a colleague. He described this as "most unusual", but the original information subsequently made its way into the public domain via an article in The Irish Times.
On another occasion, a commentary that the Government should increase the 12.5 per cent rate of corporate tax was regarded as “treason” by a senior official in a public body.
And, on another occasion, department officials diluted a warning from the ESRI before it reached the minister.
FitzGerald recounted attending meetings in Poland and discovering that certain Irish developers were planning major investments there using funds from AIB and its then Polish subsidiary, which was a big lender locally.
This set off alarm bells about overleveraging, and he brought his concerns to the Central Bank, who politely sent him on his way.
In 2007, he sought a meeting with the Financial Regulator to raise concerns about the quality of bank stress tests. For one reason or another, the meeting never happened.
This brings us neatly to the approach from a “senior economist” at AIB in early 2006 to see whether the ESRI would carry out stress tests on the bank, as it felt the Central Bank’s tests in the previous year hadn’t been robust enough.
FitzGerald felt this had come from board level. It offers an interesting insight into the mindset in AIB roughly two years ahead of the crash.
Why would the bank be concerned that the assumptions used in the Central Bank’s stress tests in 2005 weren’t severe enough, unless it was concerned that the economy was in big trouble?
Fitzgerald’s analysis suggests it was probably too late to avoid hitting the iceberg.
“By the end of that year and moving into 2007, house prices were so far above their equilibrium level that a collapse became inevitable,” he said.
