The Whitsun bank holiday weather was looking promising, and as usual, when he had no special engagements in London, Fitzwilliams liked to head for Poole in Dorset where he owned a weekend getaway, a magnificent twelve room villa overlooking the sea and where his twenty million pound ocean going yacht, the Marie Gallant II, was moored.
Fitzwilliams flew down by his private helicopter from the Battersea Heliport. The Friday afternoon rush out of London with the inevitable snarl of bank holiday weekend traffic made any suggestion of travelling by road unthinkable, though not quite as absurd as thought of travelling by rail with a crowd of bank holiday trippers for company.
His regular guests included bankers, politicians, one or two wealthy locals, and as if to spice up an otherwise dull crowd a couple of showbiz personalities. Fitzwilliams avoided sports stars, particularly football players, and the lesser nouveaux riches, even though certain of the latter had made their money in the City, including a good number of the minor property tycoons. On the other hand he always welcomed media personalities; after all they were part of the hype system that encouraged the British public to participate in wealth acquirement as he like to call it.
The locals knew Fitzwilliams was in town when they saw his black Porsche at the boat pier, not out of place amongst Bentleys and Ferraris that the local jet set used for running around. Surprisingly Poole was amongst most expensive places to live in the UK, if not the world, it was the home of millionaires and celebrities; Fitzwilliams joked it was like Monte Carlo at home.
As for Pat Kennedy, not only the bank’s number two and director of the international operations but a close friend and confident of Fitzwilliams, he was always pleased to join the junkets in Poole, even if it meant putting off a weekend down in Biarritz. Pat had been looking forward to practicing his French, though in Poole he would be able to take advantage of his smattering of Russian, which was more useful than one could have initially thought. The growing number of Russian oligarchs and their friends in London had prompted Pat’s enthusiasm for the new language that he quickly discovered could be extremely useful, especially since the Russian oligarch Sergei Tarasov had become one of Fitzwilliams’ frequent guests.
Michael Fitzwilliams, a fan of Cool Britannia from the beginning, naturally had many friends in high places and was often seen at cocktail parties with the country’s leading politicos including Blair himself, another go-getter. The two men were of the same age and Fitzwilliam’s arrival in the City, as an up and coming member of an old Anglo-Irish banking family, coincided with Blair’s accession to power and the start of the feverish banking boom. After all the Castlemain side of the family had been a part, be it modest, of British banking for generations, even though the troubles in Ireland had at one time cast a shadow over an otherwise prosperous future.
After David Castlemain’s disappearance in the Caribbean, Michael Fitzwilliam, a nephew on the aristocratic mother’s side of the supposed defunct CEO’s family, had been appointed head of the bank. Fitzwilliams had been moulded for a career in the family bank from the outset and after university and the London School of Economics he had spent a year at Harvard followed by five years with Merrill Lynch in New York.
It was in the US he first met Pat Kennedy, another young Irishman, also learning the ropes of his respective trade. Pat, wily though curiously naïve in certain worldly matters, and Fitzwilliams, in spite of their very different backgrounds, became close friends. They were not of the same class, one Protestant and the other Catholic, but they were young, far from home and discovering the world. It was in 1997 Fitzwilliams returned home to take charge of the family bank’s mortgage business in their London offices.
In 2000, the sudden and dramatic disappearance of his uncle unexpectedly broadened Fitzwilliams perspective. Up until that point he had been facing the rather uninspiring prospect of working under his uncle at the Irish Union Bank for many more years, something that did not correspond with the ambitious young banker following his eye-opening experience at Harvard and in the rarefied air of New York investment banking. In fact he had been contemplating quitting his solid but unexciting sinecure at the family bank for a position with the HSBC in London when Castlemain’s disappearance changed his destiny.
In spite of his uncle’s Cuban adventure and high tech investments, the Irish Union Bank had escaped the worse of the dot-com crisis. Fitzwilliams, with his recent mortgage sector experience, swiftly took advantage of growing property values and the booming mortgage business, which he expanded, introducing attractive packages for the Irish and UK markets, structured around the kind of models being promoted in the US.
The guests included Jeroen Hiltermann head of the Nederlandsche Nassau Bank, a venerable institution, founded in Amsterdam in 1796 for the development of business in the booming Dutch East Indies, now part of INB Holdings Plc.
The Dutch bank during almost all of its existence had been controlled by an extremely conservative Protestant family, that is until the relatively young Jeroen Hiltermann took control of the bank following the death of his grandfather. It was a deciding moment as the time was well overdue to broaden the bank’s activities and there was no lack of opportunities, the first of which had been the financing of a major computer assembly plant for a Dutch firm in Shannon on the west coast of Ireland.
Hiltermann had naturally been present for the inauguration ceremony and the cocktail that followed, which was somewhat complicated by the difficulties he had in understanding the Irish and by his inate reserve. The banker was not difficult to spot, tall and somewhat stiff, and when Pat Kennedy introduced himself, speaking a vaguely correct Dutch spoken with a solid Irish brogue, Hiltermann was pleasantly surprised. Kennedy’s firm had been engaged as accounting and tax consultants by the owners of the assembly plant. The two men hit it off and met for lunch the next day at Kennedy’s golf club in the Irish countryside a few miles from Limerick City.
Kennedy’s business sense, embroidered with amusing anecdotes relating to international business, impressed the conformist Hiltermann. Pat however took care to omit the unsavoury details relating to his almost catastrophic brush with the Irish criminal justice system. Convincingly, Pat vaunted the advantages of Ireland as a growing financial centre, privileged by low corporate taxes and few regulations, and as ever on the look out for new opportunities he had little difficulty in getting Hiltermann to invite him to stop by at the Dutch bank’s offices in Amsterdam on his next trip to the computer firm’s headquarters near Schipol.
Hiltermann was delighted to discover of Kennedy’s close relations with the new head of the Irish Union Bank and had no problem in persuading him to arrange a meeting with Michael Fitzwilliams with a view to developing business relations between the two banks.
Initially the cooperation between the two banks was timid. A series of unforeseen events changed that; first was the dotcom crash, then came September 11. With the introduction of the euro and both banks seeking a new way forward a merger became inevitable. This gave birth to the Irish Netherlands Bank.
The newly formed Irish Netherlands Bank Ltd. soon became one of the country’s fastest growing banks, able to take advantage of a bigger and international banking market that would go hand in hand with the development of the Celtic Tiger economy and the opportunities Cool Britannia offered.
The bank’s operations were divided into two spheres of operation. On the one hand the Irish Netherlands Bank Ltd., controlled the UK, Ireland and the Caribbean markets, and on the other the Irish Netherlands Bank N.V., controlled European and South East Asia markets.
With the booming Irish and UK markets, the Irish Netherlands Bank Ltd., had within two years outgrown its Dutch partner. In late 2003, INB Holdings Plc was founded in the City of London and Michael Fitzwilliams appointed as CEO. The new holding, a British banking and financial services group, controlled the Irish Union Bank and the Nederlandsche Nassau Bank with operations in Ireland, the UK, the Netherlands, the Caribbean and Indonesia.
Its UK h
eadquarters was naturally based in the City of London, from where it controlled the holding company’s subsidiaries in the Ireland, the UK and the Netherlands.
Hiltermann on his side expanded the group’s operations into New Europe and the ClubMed countries, targeting property investments. They were exciting times and the sky was the limit with the bank’s executives jetting around Europe signing new deals with an ever-growing list of partners.
The holding company’s offices were established in the newly completed 30 St Mary Axe, also known as the Gherkin, on its upper floors overlooking the City and the emblematic Bank of England. Fitzwilliams appointed the well known architect, Elliot Stone, to design a modernistic setting, announcing a new era in the bank’s history, consistent with the avant-garde architecture of the landmark tower. The result was modernistic furniture in black ash, black trimming on grey walls, black computers and charcoal grey carpeting set off by valuable avant-garde sculptures and paintings.
The newly appointed CEO took pleasure in inviting his privileged clients and business friends to the restaurant situated under the dome of 30 St Mary’s Axe; reserved exclusively for the tower’s tenants and their guests, with its stunning view of the world’s leading financial centre, dwarfing everything around it, and where it was difficult to resist the ‘master of the universe’ complex.
Fitzwilliam enjoyed all the privileges expected of a dashing figure in City banking: the luxury of a vast Knightsbridge apartment, a stable of luxury cars, including his favourite high powered Porsche, and to crown his success the Marie Gallant II, his recently acquired motor yacht. In spite of, or perhaps because of, his strict family upbringing and the life he had acquired a taste for in New York, he was ineluctably drawn towards the glittering aura of London’s tight circle of rich and powerful people. And naturally his old family wealth together with his eclatant foray into the City never failed to impress his newly made friends. From what he was soon describing as his eyrie, he projected his bold banking style that soon made him the darling of London’s asset boom, drawing the admiration of New Labour’s politicians and fellow travellers alike.
Financial markets had drifted into a period of calm, lulling Fitzwilliams and his friends into a precarious complacency. He and many others like him fiddled whilst politicians averted their eyes from the crisis that was stoking up. As his party sunned themselves on the deck of the Marie Gallant II many serious people in the London and New York pointed, unheeded, at the imminent dangers the banking world faced. They feared that investment banking had gotten out of control, that the accumulation of massive personal and national debt would plunge the world into a financial crisis never before seen, dwarfing tulip mania, the South Sea Bubble, the 1920s economic bubble, the Japanese asset bubble and the dot-com bubble.
In the middle of the first decade of the twenty first century, investment banking, and its products, was beginning to resemble a South Sea Bubble company that went public in 1720 and advertised itself as ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’ [sic].
Amongst investment banking’s complex products were credit derivatives, which at the outset were insurance policies on large loans. A lender, for example a bank, could hedge a bet by buying a credit derivative to cover losses if the debtor defaulted. Credit default swaps became the most widely traded form of credit derivative. Though CDSs resembled insurance policies, there was in fact no need to actually hold an asset or sustain a loss, as a result CDSs became broadly used as a means of earning money by gambling on market fluctuations.
Thus in general terms, a CDS functioned like an insurance policy, enabling investors to insure against the default of municipal bonds, corporate debt and mortgage-backed securities. Thus a hedge fund, for example, could collect premiums by selling insurance on a risky bond. However, if the bond went into default, the hedge fund would have to pay out on the claim.
In this way risk was eliminated. Moreover, CDS cover permitted banks to remove the risk from their books, allowing them to lend more without having to increase their legal reserves. Further, unlike traditional insurance, no collateral was required, which meant the hedge fund could sell guarantees without having the least asset to back them up.
This would have seemed fairly reasonable, except hedge funds, to increase their business, allowed third parties, not even remotely concerned by the transaction, to join in, buying CDSs linked to the same loan. Which was equivalent to betting that someone unconnected party would have an accident, or taking out a life insurance policy on a total stranger.
Kennedy