How the State got screwed on Dublin Docks

It beggars belief that the State owned the entire controversial Irish Glass Bottle site at Poolbeg, through Dublin Port Company, in 2005. But the following year, after the freehold title was acquired by a subsidiary of the tenant under a loophole in the provisions of the Landlord and Tenant (Ground Rents) No 2 Act 1978, the site was offered for sale by public tender with the State having a 33.3% share of the sale proceeds, not the more typical 50:50 share that had been the custom in instances where long-term commercial leases were being disposed of in a similar context.

The site was sold to a consortium that included Dublin Docklands Development Authority (DDDA) as a 26% shareholder, developers Bernard McNamara and Derek Quinlan in late 2006 for a consideration of €411 million. The State stood to recoup one-third of this (€140 million) but ought to have recouped a further €65.5 million had the customary landlord/tenant 50:50 split applied.

DDDA sought the permission of its supervising minister, Dick Roche to enter the joint venture and to increase its borrowing capacity to €127 million, the maximum allowable under governing legislation; permission to enter a joint venture and indicated on 12 October 2006 that the cost of the proposed transaction in respect of which the loan powers were sought would be €220 million.

Mary Moylan, an Assistant Secretary from the Environment Department, with line responsibility for DDDA, was an Executive Board member who participated in 12 of the 15 board meetings that took place in 2006. Ministerial approval was received on 24 October 2006. Ten days later, on 3 November, the Executive Board of DDDA agreed a tender bid of €411 million but Moylan’s Minister and Secretary-General was not informed of the massive and fundamental change in the terms of engagement.

The assessment of the site value was left to Bernard McNamara, in recognition ‘of his expertise and experience and if he had some additional information which convinced him that the bid should be increased then the Executive Board of DDDA agreed that McNamara could be allowed to increase the bid as he saw fit to a maximum of €437 million’.

A professional valuation of the site was not obtained in advance of determining this bid although one was obtained the day after the decision to submit with an application for loan finance to Anglo Irish Bank, two of whose directors, Lar Bradshaw and Seán FitzPatrick, were members of the 8-person Executive Board of DDDA, Bradshaw was chair of the Executive Board and FitzPatrick was his predecessor in that role.

The stated objectives for the involvement of DDDA in this joint venture was to (1) ensure that the site would be developed imminently (2) expedite the planning process (3) advance its social amenity and less commercially desirable agenda and (4) input to the architectural design and tone of the development.

DDDA operated on the basis of creating a Master Plan for parcels of the 500+ hectares within its jurisdiction. The 2003 iteration of this for the Poolbeg Peninsula had not been completed when this deal was executed in 2006 but they had broad stroke ambitions to have facilities in place for research and development and industrial and commercial usage. The promoters of the joint venture envisaged a return of 15% on their investment. A substantial portion of this would have comprised 1-bedroom apartments overlooking an incinerator and selling for prices up to €1 million each. But no detailed analysis was carried out by the Executive Board or management of DDDA for a proposition that was supposed to have a ceiling of €35 million for DDDA.

The negotiation of funding for this splurge took place with Anglo Irish Bank and Bank of Ireland. Bradshaw and FitzPatrick were both directors of each organisation while another member of the esteemed executive Board, Declan McCourt was a director of Bank of Ireland, as well as being a director of the vehicle importer and distributor, OHM Group. While these three absented themselves from the actual discussion of the funding issue at the board meetings it was Bradshaw who signed the loan guarantees with Anglo Irish Bank.

By 2010 DDDA had a potential exposure of €81.9 million but after a settlement was reached with NAMA, which acquired the lending banks’ loan assets, its actual exposure was €52.1 million.

Some €36.3 million was allocated to site remediation. The value of this 10 hectare site, on which €431 million was spent before taking account of remediation costs, was put at €45 million at the end of 2010.

There has been never been evidence that the scale of this splurge was ever made known to the Minister for the Environment, Community and Local Government and in May 2012 the current Minister, Phil Hogan, announced the shuttering of DDDA. Moylan remains an Assistant Secretary in charge of finance and central services. The five other member of the Executive Board in 2006 were Angela Cavendish from Raglan Road Ballsbridge, a director of Alexsam Limited, Donall Curtin a director of Byrne, Curtin Kelly an accountancy practice, Niamh O’Sullivan from Ranelagh, a director of Arup Consulting Engineers and Joan O’Connor formerly a director of Interactive Project Managers Limited.

Irish bank bail out costs escalate

 

The cost to the Irish State of capitalising credit institutions at September 2010 was as follows:

 

€ Billion	Cost of acquiring shares	Preference Shares	Promissory Notes	Total State Capital at Sep 2010
Anglo Irish	4.0		18.88	22.88
AIB	0.28	2.5	-	3.78
BOI	1.95	1.8	-	3.75
INBS	0.10	-	2.60	2.70
EBS	0.10	-	0.25	0.35
TOTAL	6.43	5.3	21.75	33.48

 

The cost of future assistance is estimated at €12.26 billion

€ Billion	Projected Future Assistance	Return on Investment to date	Overall State Capital
Anglo Irish	6.4		29.28
AIB	3.7		7.48
BOI	-	-0.49	3.26
INBS	2.7		5.40
EBS	0.0		0.35
TOTAL	12.8	-0.49	45.74

 

A substantial proportion of the shares in Bank of Ireland have been converted into preference shares leaving a balance of ordinary shares amounting to €1.95 billion.

The State continues to hold €3.5 billion in preference shares.

The National Pension Reserve Fund is to underwrite a placing and open offer of €5.4 billion in AIB.  If necessary, the NPRF underwriting commitment will be satisfied by the conversion of up to €1.7 billion of its existing preference shares in AIB into ordinary shares. along with a new cash investment.for the balance of €3.7 billion in ordinary shares.

The foregoing assumes that the AIB investment in M&T Bank Buffalo New York will be sold and that other assets will also be disposed in due course.  If there is a shortfall of capital by 31 March 2011 any shortfall will be met by the conversion of a proportion of the remaining €1.8 billion of preference shares. 

Future capital needs of EBS are to be met from negotiations with several parties about its future. 

Future transfers into Anglo Irish Bank and Irish Nationwide Building Society are classified as capital transfers and a directly returnable investment.

All investments to date in AIB and BOI have been provided by the National Pension Reserve Fund.

Fingleton’s fantasy at Irish Nationwide is all dust

The Irish Nationwide Building Society presented a gung-ho image of its achievement, ambitions, prospects and the calibre of its chief executive, Michael Fingleton, even if the language used to express this was banal and repetitive.

Massive Expansion in Lending

The increase in mortgage lending between 2003 and 2007 was 189%.  This is why taxpayers are being stalked for €2.7 billion in bailout money.  This is why such a high proportion of the assets of this decrepit building society are being dumped on the doorstep of NAMA.  This is why the Irish Government want the citizens to be subdued, indifferent and ignorant.  Ireland’s GDP grew by 36.6% from €139.4 billion in 2003 to €190.6 billion in 2007

Loan growth Bank of Ireland between 2003 and 2007 was 19%; by AIB was 37% and loan growth at Anglo Irish Bank was 37%.

The loan growth at the three Icelandic basket-case banks between 2003 and 2007 was – Kaupthing 72%, Glitner 54% and Landsbanki 57%.

At the benign end of the scale, the Swiss banks must have appeared to Fingleton to have been in a coma.  Loan growth over this 5-year cycle at UBS was 9% and at Credit Suisse

Chicken’s come home to roost

Results for year ended 31 December 2009 reported a loss of €2.48 billion, a requirement for the Irish taxpayer to provide €2.7 billion in bailout funds, a declarations that assets with a book value of €8.7 billion will be sold to NAMA and that 96% of its loan impairment provisions relate to commercial loans.

The Chairman, Daniel Kitchen stated that the problems reported are a consequence of the nature of the operation of the business which was “clearly a flawed model” and that he was sanguine about Irish Nationwide’s capacity to ‘outperform’ (wow), in the short term.  The new chief executive, Gerard McGinn, attributed the lousy performance to the “impact of the lending policies and practices of previous management”.

It is interesting to see how previous management reported their annual results from the time the credit bubble began to inflate on 1 January 2003.

2009 Results

Interest earned from loans was €529.4 million but €324 million of this has not is ‘unrealised’!  Interest paid on customer savings accounts was down 42.3% to €420.8 million.  If the ‘unrealised’ interest were never to materialise, the net interest income of Irish Nationwide in 2009 would be –€215.4 million.

A total of €4.793 billion in debt is due for repayment before 22 September 2010. How can this be accomplished?

Of the €1.189 billion owing to banks, €1.052.3 billion is repayable on demand and the balance in less than three months.

Impaired loans amount to €2.792 billion but only €105.8 million of this impairment relates to Irish residential lending.

“The final losses on the asset portfolio remain highly uncertain”  until each and ever asset is resolved.

 

Demutualisation

While there were 23 building societies in existence when the State was founded that number shrunk to two after the passage of the Building Societies Act 1989 – EBS and Irish Nationwide. ICS Building Society was acquired by Bank of Ireland where it has operated within the Ireland Retail Division – and is about to be disposed of.

One of Fingleton’s principal goals was to demutualise ‘his’ building society

1994 Annual Report: “In order to enhance all the options open to the Society we

continue to seek a change in Section 102 of the Building Societies Act, 1989. On the

basis of the new structuring within the whole State banking and financial sector through the proposed disposal in whole or in part of the TSB Bank, ACC Bank, and

ICC Bank the restrictions of Section 102 are increasingly superfluous and irrelevant.

It is positively discriminatory against the Society, especially in that the Society must

now compete, without any privileges or advantages, with all other financial institutions to whom such a restriction does not apply. It is in the interests of our shareholders and our staff that this Section be amended to reflect the new realities of the market place.”

1998 Annual Report:  “While mutuality is still a relevant concept even if the number of practitioners are reducing (there really are now only two, Irish Nationwide and the EBS) this as we have repeated often before should not be to the exclusion of other options and the Board of the Society has never presumed on behalf of its members to exclude any such option. Indeed that is why we have consistently sought to have Section 102 of the Building Societies Act, 1989 amended to enable the Society to have the same options that are available to other competing financial institutions. We hold no brief for mutuality as an exclusive option. If we were convinced that changing the corporate status of the Society was the correct option for the members and staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

1999 Annual Report “Your Society gave a commitment to review our present and future status during the year in line with market forces and developments. This review was well advanced when we were forced to pause and to reconsider the position in the light of developments in the financial markets and particularly the serious downturn in the share values of the various financial institutions. Suffice to say that everything is on hold at the moment but we will continue to monitor the situation on an ongoing basis.

We have no brief for mutuality as an exclusive option. If we were convinced that changing

the corporate status of the Society was the correct option for the members and the staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

Personal Remuneration

Michael Fingleton enjoyed personal remuneration from Irish Nationwide of €10 million and a personal pension fund in 2006 just shy of €29 million.

Fingleton’s Personal Remuneration
at Irish Nationwide Building Society

2003	€910,000
2004	€1,034,000
2005	€1,269,000
2006	€1,836,000
2007	€2,313,000
2008	€2,417,000
009	€221,000
TOTAL	€10,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors’ Report 2003:  “The excellent results we now report are the strongest yet in the Society’s long history of growth and achievement and significantly enhance shareholder value.

The Society has a strong and effective management team headed by a strong and focused chief executive (Fingleton) whose experience and expertise has produced exceptional results year after year

The Society has improved its cost income ration to a new record low of 21.43%

The Society’s plans for demutualisation have made further progress during the year (2003) and the Government agreed, at the Society’s request, to bring in appropriate legislation to enable the Society achieve a solution which would reduce the uncertainty of future ownership and greatly enhance shareholder value and give the Society the options required to do so”

Directors’ Report 2004

“The excellent set of results we now present clearly reflects the effectiveness of the Society’s strategy that has been successfully implemented and developed over many years.

The success of the Society is reflected in its strong chief executive, its excellent staff, its highly qualified and experienced Board of Directors.

The Board of the Society is fully committed to demutualisation.  The Minister for the Environment, Heritage & Local Government (Martin Cullen) issued a full statement on behalf of the Government on 16 December 2003 announcing the Government approval of a package of measures to amend the current Building Societies legislation, including the removal of the five-year barrier under Section 102.  The proposed legislation is extensive and contains several provisions to enhance the future development of building societies as independent institutions as well as removing archaic unnecessary procedures.

On 15 September 2004 the Minister, Martin Cullen,  wrote to the Society stating “my Department is at present involved in the drafting process with a view to finalisation of the legislation in the Autumn (of 2004)”.  The Board of the Society,of course, welcomes those announcements and statements but is disappointed that the proposed legislation will not materialise until later in 2005.

The demutualisation process must be managed in a prudent, professional and orderly manner in order to maximise the value for the management, staff and (lastly) members.

The cost income ratio was further reduced during the year from 21.43% to a new record low of 20.24%.”

Directors’ Report 2005

“The record results we now report are the strongest yet in the Society’s long history of outstanding growth and achievement.  The excellent set of results reflects the effectiveness of the strategy that has been successfully developed and implemented over many years.

The long awaited legislation is now being drafted and we understand will be published shortly and finally approved before the Summer recess (of 2006).

In the year under review, the Society further improved its cost income ratio to a new record low of 15.18%.

Under the strong leadership of the Managing Director together with a committed and supportive staff, backed by an informed and unified Board, the underlying value of the Society has increased six-fold in the past ten years”

Directors’ Report 2006

“The record results are by far the strongest since the formation of the Society in 1873.

The results demonstrate once again the exceptional financial strength of Irish Nationwide and clearly reflect its strong management together with the effectiveness of its lending strategy developed and successfully implemented over the years.  The Society has developed a successful business model and continues to be focused on our chosen market.

In a year which may well be the last reporting year as a building society, it is appropriate that the Society should present such an outstanding set of results.

Despite relentless opposition from some of our members’ and other vested interests’, the long awaited legislation formally became law in August 2006.  The Board decided to await the publication of the 2006 audited accounts before formally going to the market.  The value of the Society has been enhanced and the net book worth of the Society is up 27% to over €1.2 billion”.

Directors’ Report 2007

“The Board will continue to seek a purchaser for the Society at an acceptable price and will consider all the options open to it to achieve the objective and to realise the optimum value for its members and staff.

The exemplary results we are privileged to report are by far the strongest yet in the Society’s long history of growth and achievement and significantly increase shareholders value with the Society’s net book worth now in excess of €1.5 billion.

The cost income ratio is now at a record low of 10% having fallen from 14.44% in 2006”

Directors Report 2008

“ … was a disappointing year for the Society due to the disruption in global financial systems, the onset of the recession in Ireland and the UK and the resultant downturn in property values. 

Cost control has always been and continues to be a major objective of the Society’s policy.  The 2008 cost income ratio is 17% due to reduced income in 2008 rather than cost increases.

The Board wishes to thank Mr Fingleton for the enormous and unique contribution he has made to the Society over the past 37 years and wishes both Michael and his wife, Eileen, many happy years of retirement”

Directors’ Report 2009

“It is with great disappointment that I have to present to you the accounts for the year ended 31 December 2009 which reflect unprecedented levels of impairment on our loan book which gave rise to losses on a massive scale in the context of the Society.  The collapse of property markets in Ireland and abroad gave rise to the impairments but this was exacerbated by the nature of the operation of the business which was clearly a flawed model.  Final losses on the asset portfolio remain highly uncertain.  The financial results reflect the impact of the lending policies and practices of the previous management.  The scale of losses reflect the failure of the Society’s commercial lending strategy which was over reliant on asset values.  96% of the loan impairment provisions relate to commercial loans.

The Group’s customer accounts decreased by €1.5 billion in 2009 as a result of deposit outflows from the Group’s Isle of Man subsidiary and reflects concerns held by UK investors about deposit security despite the Irish sovereign guarantee.  2010 remains highly uncertain in the context of an industry seeking to define its future structure.”

Mortgage Lending and Mortgage Funding

 

	Total Mortgages €	Commercial Mortgages % Total	Customer Accounts (€ Savings)
2003	4,248,000		3,465,000
2004	5,553,000	35%	4,755,500
2005	7,572,000	32%	5,733,500
2006	10,306,000	76%	6,602,700
2007	12,281,000	80%	7,250,100
2008	10,473,900	78%	6,785,000

Scope for Anglo Irish Bank to become a ‘business bank’ very slim

An objective cited for bailing out Anglo Irish Bank and committing €22 billion to date is that Anglo would become a business bank in due course.  But, of course, AIB and Bank of Ireland will also need to become business banks, even if operating on a diminished scale.  What scope is there for all three to be ‘business banks’?

Anglo reported a loss of €12.7 billion on a loan book of €72.1 billion – all property related, including hotels and restaurants.  How realistic is the proposition that a bank where the average remuneration by employee is over €88,000 per annum but where the loss per employee exceeds €7.5 million become a business bank?  The patron of Anglo Irish Bank since nationalisation, the Department of Finance, employs 634 civil servants whose average pay in 2010 will be €55,678

The scale of borrowing by Irish residents  in areas outside construction, property development, hotels / restaurant  and residential mortgage lending is:

 

€ Million	June 2009	Sep 2009
Agriculture and Forestry	5,341	5,210
Fishing	381	374
Manufacturing	7,821	7,559
Electricity, gas and water supply	1,015	1,100
Wholesale trade and repairs	13,236	12,965
Transport, storage and communications	3,283	3,225
Financial institutions	86,181	86,206
Education – schools and colleges	823	856
Health and social work	2,638	2,660
Community, charity, social	2,926	2,843
Personal finance for investment	2,659	2,726
Other personal finance	19,210	17,638
	€145,514	€143,362
Mortgages, property development, construction, hotels and restaurants	€240,876	€233,886
Total borrowing by Irish residents	€386,390	€377,248
	(62%)	(62%)
Anglo Irish Bank	15 Months to 31 Dec 2009	Year to 30 Sep 2008
Staff costs	€186 million	€206 million
Average number employees	1,681	1,864
Average cost per employee	€110,648	€110,515
(Loss) / Profit for period	(€12,702 million)	€664 million
(Loss) / Profit per employee	€7,560,381	€356,223

 

 

 

Requirement to boost capital of Irish banks is a huge challenge.

The nation recoils, stunned, by the scale of the NAMA enterprise.   It is interesting to reflect on the scale of additional capital needed by the five banks and building societies that are NAMA clients.  Collectively, NAMA clients’ require additional capital of  €21.8 billion by Christmas, with Anglo Irish Bank accounting for €8.3 billion of this.  This is to be provided by the State as will €3.2 billion needed by the two building societies.  But AIB and Bank of Ireland have to find €10.1 billion by Christmas.

The market capitalisation of all the companies quoted on The Irish Stock Exchange is just shy of €130 billion today.  This figure includes relatively large market capitalisation in CRH €13.2 billion, Diageo €31.2 billion, Tesco €31.1 billion and Tullow Oil €12.4 billion.

The market capitalisation of AIB is €1.05 billion and this bank requires an additional €7.4 billion.  Bank of Ireland has a market capitalisation of €1.6 billion and requires additional capital of €2.7 billion.  Irish Life & Permanent Holdings Plc, which is not a NAMA client, has a market capitalisation of €808 million.  This is the bank which coughed up €7.5 billion that distorted the balance sheet of Anglo Irish Bank on 30 September 2008.

The cumulative loan book of the five NAMA clients and Permanent TSB is over €400 billion and this includes loans made in Ireland and elsewhere.  Approximately €100 billion of the €147.2 billion of residential mortgages in Ireland is attributable to these six institutions.  This is a phenomenal scale of indebtedness and must be seen in the context of housing trends in Ireland over the past decade.

A recent UCD study of residential vacancy levels showed that there were over 345,000 vacant housing units in the country.  Allowing for 64,520 holiday homes which are vacant from time to time and a standard 5% vacancy rate which is the norm and that approximately 10,000 houses are obsolete, there are still over 170,000 vacant houses in the country that fall into the ‘exceptional’ character.

Outstanding private sector credit in Ireland, according to the latest data from the Central Bank is €365.5 billion.  It had exceeded €400 billion in October and November 2008.  While the overall level of private sector credit has been somewhat reduced, the amount of mortgage credit outstanding has remained stubbornly high – close to €148 billion since September 2008 when the Irish banking crisis exploded.

Real estate indebtedness if north of €95 billion while the construction sector owes a further €19 billion.  Agriculture and forestry owe €5.3 billion.  The manufacturing sector owes €7.8 billion. The hotel and restaurant sector, which apparently has 15,000 room in excess of accommodation demand owes €11.2 billion.

Where is the additional capital to come from when all of these circumstances are taken into account.  How many decades will it take for the Irish economy to experience a positive charge?  Comments about the collapse of Lehman Brothers and Bear Sterns are comparable to describing a hurricane in the Caribbean.  The damage inflicted on the Irish economy is due to delinquency closer to home and those who inflicted this might have the courage to own up to it.

More gloom emerging from Anglo Irish Bank

Recent  media reports suggest that Anglo Irish Bank is set to announce the highest losses in Irish corporate history a whopping €14 billion as the former financial director of the Bank, William McAteer, FCA is detained at 6.30 AM at his home this morning, March 24th,  for Garda interrogation under S4 of the Criminal Justice Act. 

Today’s papers advise that 70 of the Bank’s employees are to receive pay increases because they took on extra responsibilities. 

The 2009 Interim Report for the six months to 31 March 2009 reported a loss of €4.1 billion arising from specific lending impairment charges of €3.7 billion and collective lending impairment charges of €400 million.  The Government provided Anglo with €4 billion as a consequence.

The Bank retained the services of Drury Communications to explain the 2009 Interim Report which were announced by former chairman, Donal O’Connor.

Was it really necessary to retain external high cost publicists to announce these results to the sole shareholder, The Minister for Finance? 

Will external publicists be employed to explain the pending results, or will some of the 1,800 employees have the necessary fluency to deal with this?  Anglo Irish Bank employed an average of 1,864 persons on 30 September 2008 at a total cost of €206 million.  That is an average cost of over €110,000 per person. 

Red-neck AIB Mujahadeen jihad designed to humiliate the Government

THE imperial tribal elders’ at AIB failed to fulfil the Government preference to appoint an external candidate to the top job and attempted, through stonewalling,  to bust the salary cap imposed by the Government.  Their smug and conceited attitude was tantamount to economic terrorism and had they prevailed over the Minister for Finance they would have humiliated this nation.

The Chairman of the Remuneration Committee, after being cudgeled into submission,  emerged wearing sandals from from his wigwam today and rattling his worry beads wailed, whinged and moaned in the media about the prospect of their chosen candidate earning reduced remuneration and how the salary prescribed by the Government was an impediment to attracting candidates. 

It is a pity that their chosen candidate didn’t choose to make his brilliance available to the world’s financial markets instead of dealing with an extra €1 billion of bad debts at AIB if he is to be so terribly underpaid and earning less than the plastic bag salesman paid by the State at Dublin Airport.

The gilt-edged genius that led the three Irish banks throughout the property bubby receive €34,807,000 over the five years from 2003 to 2007.

The remuneration of the chief executive of AIB during the property bubble was:

Year	Incumbent	Salary	Total Remuneration
2003	M Buckley	€660,000	€1,445,000
2004	M Buckley	€775,000	€1,399,000
2005 to 30 Jun	M Buckley	€430,000	€1,459,000
2005- fm 12 May	E Sheehy	€520,000	€1,104,000
2006	E Sheehy	€860,000	€2,436,000
2007	E Sheehy	€916,000	€2,105,000
TOTAL		€4,161,00	€10,048,000

 

The remuneration of the chief executive of Bank of Ireland during this period was:

Year	Incumbent	Salary	Total Remuneration
2003	M Soden	€800,000	€1,610,000
2004	M Soden	€900,000	€1,318,000
2005 to 29 May	M Soden	€167,000	€1,594,000
2005 fm 3 Jun	B Goggin	€911,000	€1,115,000
2006	B Goggin	€1,000,000	€2,525,000
2007	B Goggin	€1,100,000	€3,998,000
TOTAL		€4,878,000	€12,160,000

 

To complete the profile of those Irish banks that have gouged €11 billion of taxpayers’ money, a gesture, described in the latest Interim Report of Bank of Ireland as ‘significant’ in its case – the remuneration at Anglo Irish Bank is set out below:

Year	Incumbent	Salary	Total Remuneration
2003	S FitzPatrick	€494,000	€1,885,000
2004	S FitzPatrick	€649,000	€2,346,000
2005	S FitzPatrick	€775,000	€2,721,000
2005 fm 22 Sep	D Drumm	€6,000	€19,000
2006	D Drumm	€663,000	€2,354,000
2007	D Drumm	€956,000	€3,274,000
TOTAL		€3,543,000	€12,599,000

AIB Board need to get off their vain, egotistical, stubborn arses and recruit an outsider as CEO

AIB have been flying kites about the prospect of its recently appointed Chairman, Dan O’Connor, becoming an executive chairman. O’Connor, who is also a director of CRH Plc since June 2006, became an AIB director in 2007 when the property bubble had burst. He succeeded Dermot Gleeson as Chairman some months ago.

But what would such an appointment mean for corporate governance at AIB and public confidence?  There are three and a half billion reasons why AIB need a new broom in the corner office and these have to do with sweeping away the viral influence and toxic legacies of Mr Scanlon, Mr Mulcahy, Mr Buckley and Mr Sheehy, each of which severely degraded the stature of AIB.  Being systemically important does not imply that those trusted with this ‘importance’ ought to consider themselves immune to the architecture and principles of acceptable standards of corporate governance.

Cadbury Report on Corporate Governance

The Cadbury Report on Corporate Governance was published in December 1992.  There was extreme concern at that time about standards of financial reporting and accountability and this was heightened by the closure of Bank of Credit and Commerce International (BCCI) and the Robert Maxwell saga.

BCCI was closed after major episodes of fraud and manipulation prompting thousands of creditors to sue the Bank of England for failure to properly oversee BCCI. Robert Maxwell drowned in November 1991 when he fell overboard from his yacht, the Lady Ghislaine. which has been cruising in the vicinity of the Canary Islands.  His publishing and media business collapsed as a consequence of fraudulent transaction that he perpetrated, including the illegal use of pension funds.

The Cadbury Report established a code of best practice intended to achieve adequate standard of good governance for all listed companies and those listed on the London Stock Exchange were to be obliged to state if they are, or are not in compliance.

 

Role of Chairman

The chairman’s role in securing good corporate governance
is crucial. Chairmen are primarily responsible for the
working of the board, for its balance of membership subject
to board and shareholders’ approval, for ensuring that all
relevant issues are on the agenda, and for ensuring that all
directors, executive and non-executive alike, are enabled
and encouraged to play their full part in its activities.
Chairmen should be able to stand sufficiently back from the
day-to-day running of the business to ensure that their
boards are in full control of the company’s affairs and alert
to their obligations to their shareholders.

 

Separation of Powers

Given the importance and special nature of the chairman’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power.
We recommend, therefore, that there should be a clearly
accepted division of responsibilities at the head of a
company , which will ensure a balance of power and
authority, such that no one individual has unfettered
powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board.  No such independence has been apparent on the board of AIB, Irish Life & Permanent, Irish Nationwide or Bank of Ireland who have behaved like myopic overfed sheep.  The board of EBS at least jettisoned their deadbeats promptly.

 

Recent Irish Financial Sector History

It doesn’t take a genius to understand the appalling consequences of concentrated power in two of the six financial institutions that are now standing with their begging bowls at the door of NAMA.

The overwhelming influence of Sean FitzPatrick provided him with an uncluttered platform to do what he wanted with impunity.  The behaviour of Michael Fingleton, at Irish Nationwide Building Society meant that 80% of the business of a mutual society was focused on property speculation and obscene financial self-aggrandisement on a woeful scale.

AIB has an appalling record of corporate governance which ranged from aping FitzPatrick, DIRT evasion, Insurance Corporation of Ireland collapse in 1985, flagrantly overcharging customers’, allegations of share price support for Dana Exploration through a transfer into the widows’ and orphans’ account in the AIB staff pension fund in 1988, personal tax evasion by former chief executive Gerald Scanlan, facilitation of endemic tax evasion by its own customers through illicit overseas accounts, chaotic supervision of its US subsidiary, Allfirst resulting in the Rusnak $691 million FX rip-off during the tenure of former CEO Michael Buckley, .  Everyone remembers the standards of corporate governance by these sycophants when they deferred like 18th century slaves to the whims of their KBI (key business influencer) Charles Haughey and Des Traynor 

I would be astonished if O’Connor is not an individual of the highest probity and virtue but the audacity of the AIB board attempting to subvert the wishes of the Government having stung the taxpayers’ for billions of €, is absolutely unconscionable. The destiny of this business rests with taxpayers’ not shareholders’.  The toxic corporate culture must be exterminated.  The ultimate failure of this brazen culture is in it flaccid impotence to maintain adequate core capital without State intervention and its final act of devastation was to the role it played to inflate the property bubble that collapsed the Irish economy, perhaps for a decade. 

Time for The Public Accounts Committee to make its mark

THE Chairman of FÁS has resigned and the rest of the board is set to resign. When the Public Accounts Committee considered the examination of the Comptroller & Auditor General into FÁS affairs last week, Bernard Allen, the Chairman of the Committee rebuked Niall Saul, the Chairman of the Audit Committee and non-executive Director of FÁS, who was contemporaneously giving a radio interview while the Committee proceedings were under way, - for doing so. He would have preferred to hear Saul’s views directly at the Committee.

I listened to a recording of this interview this evening. Saul was at pains to point out that the Audit Committee conducted its role vigorously but were impeded and frustrated by the leadership of the agency, as was the Public Accounts Committee. The Audit Committee were presented with 22 complaints against the Internal Audit team, none of which were upheld. The Audit Committee may have conducted its affairs with textbook perfection but the hidden hand of vested interests lurked persistently in the twilight until the C&AG shone a penetrating light into the murkiness the debacle in April 2008 and, again, in June 2009.

The FÁS controversy was exposed by the Sunday Independent and that publicity was the catalyst for the urgency of resolution. The preliminary comments made by Rody Molloy, on this day twelve months ago, are interesting to revisit in the light of what is now known. Molloy stated then that “FÁS is not a perfect organisation” and “unfortunately, the internal audit reports released by us under the Freedom of Information Act have been sensationalised by the media and used by some with a destructive agenda towards FÁS”. While Molloy stated that he recognised the efficacy of the audit function he also expressed concern “that anything written will be used by persons outside the organization with a negative agenda” and that “if these reports were released into the public domain they could be damaging to the organization”.

Did he not consider that the media would have no credibility if damaging insinuations had no real substance? These were surely the comments of a person whose own organisation was imploding under him and who had isolated himself to the point of downfall. The C&AG Report has borne this out, not the use of the word ‘entitled’ in place of ‘eligible’.

But these comments also offered a rich insight into the culture of FÁS – an agency whose scope and budget had grown so much that a great many more snouts were feeding at its trough than was ever envisaged. The Prime Time investigation into meals-on-wheels in Castlebar did not inspire optimism that all the effort and expenditure was wise, prudent and appropriate. The importance of an organisations culture should never be underestimated. It is culture that facilitates change; guidelines incur inertia.

The persistent use of the legal fig leaf by other FÁS contributors to The Public Accounts Committee was another symptom of a death rattle and reminded me of the defenders of the ‘B’ Specials police reserve in Northern Ireland decades ago.

Mirror, mirror on the wall,
Who is the fairest of them all?

It was the same newspaper that blew the gasket of the DIRT controversy, submerged since 1991, with a headline on 5 April 1998 ‘AIB Had £600 million in “Bogus” Accounts’. The role played by the Public Accounts Committee in the 1999 – 2000 Parliamentary Inquiry into DIRT was pivotal in charting a new direction with respect to this particular issue.

Impact of DIRT Inquiry

The economic, social and political impact of the DIRT Inquiry was comparable in scale and importance to a grand slam rugby victory.

One constituency embraced radical change because they felt they had no other choice – their survival was at stake. The game changers were The Revenue Commissioners. Not alone did they eventually collect hundreds of millions of euro due in taxes, interest and penalties, but a new generation of competent leadership successfully reformed their own organisation. Reform did not come easily, nor did it come quickly. It came with painstaking effort - but it came and it endured.

The other constituency – the banks did not fundamentally change because those in charge believed that change and reform was beneath them. They knew they were systemically important. They also knew their influence could prevail against all comers in most circumstances. Why else would they have overcharged customers with impunity?
They, of course, paid whatever they were obliged to pay and complied, in certain respects, with other mandatory matters.

But the fundamental self-serving, obscenely remunerated culture prevailed because nothing impacted on them personally to make change happen or threaten their personal status or income until they scuttled the economy last year. Four of them were so nonchalant that they were cited for personal income tax evasion by The Revenue Commissioners on 28 March 2006. Reform, it seems, was only for the ‘little people’. Their legacy is now overwhelming.

Taxes and penalties amounting to hundreds of millions of euro were recovered by the Revenue Commissioners, whose own organisation was radically overhauled and invigorated to make it fit for purpose and recognised as such across the world. The DIRT Inquiry did not, unfortunately, lead to a a similar cultural renaissance in the banking system, where rampant overcharging of customers and shoddy standards became endemic and some of whose senior executives were cited for personal tax evasion by the Revenue Commissioners in March 2006.

Department of Finance Guidelines

Much has been made of the Department of Finance Guidelines with respect to the retirement terms of Rody Molloy. These Guidelines were created in 1998 by John Hurley, the retiring Governor of the Central Bank. They were intended primarily to deal with circumstances in State bodies where chief executives were recruited on fixed-term contracts. Their purpose was to establish clear and consistent maximum limits on the pension and lump sum payments that could be provided to a CEO who was either retiring at the natural conclusion of a contract or was retiring prior to that at the request of his board for relatively benign reason – such as a desire for a change of leadership, or direction at the agency concerned.

The Guidelines provide for the payment of a pension and a lump sum to a retiring chief executive aged 55, having acted in that role for at least 6 years, with 15 years pensionable service in the public sector based on actual reckonable pensionable service. A retiree could possibly be granted one added year of pensionable service for each year in excess of 15 years overall actual service in the public sector, subject to a maximum of 5 years.

A person who voluntarily retires does not qualify for these arrangements. Alternative arrangements are in place for younger retirees.

The Guidelines particularly stress that the board of a State body is free to apply lesser benefits or not to apply early retirement benefits at all. Bearing in mind the Guidelines were created to deal with benign circumstances the example of a board desiring to reappoint a chief executive to another fixed term as an instance where such additional benefits would not be offered, is cited. There is no reference in the Guidelines to retirements in controversial circumstances, which is not surprising.

Public Accounts Committee
a potential game-changer

Where does this leave the Public Accounts Committee in its deliberations with respect to FÁS? The side issue of the company Audi has surfaced but this matter, which is now to make its fifth appearance before The Public Accounts Committee since 2 October 2008, has ramifications that transcend FÁS. Their deliberations will have a profound impact on the entire State sector.

The implications of the recent retirement of Paul Moloney as Chief Executive of Dublin Docklands Development Authority have similar, but unascertainable and potentially serious implications, when the details of the transactions involving Anglo Irish Banks and the Irish Glass Bottle Co site are disclosed. Moloney held this position since 2005 having worked previously with Dublin City Council. His appointment to the Authority was blessed with superlative tributes by then Chairman, Lar Bradshaw, who was to resign from the board of Anglo Irish Bank last December, along with his close friend Sean FitzPatrick.

The entire State sector is observing unfolding developments closely to glean what the consequences of the C&AG examination are. They are also closely watching how Sean FitzPatrick deals with his debts due to Anglo Irish Bank and whether the Minister for Finance is kept appropriately abreast of developments by those acting in the public interest.

If there are no apparent consequences, apart from the thrashed reputations of the institutions connected FÁS and the burden that is borne by those who represented these institutions together with the personal distress that Molloy must inevitably endure, then a damaging vacuum is established. How is it possible to clearly identify the boundaries of what is acceptable and what is not acceptable when standards fall well short of acceptability and serious damage ensues? If the boundaries are unclear, or there are no boundaries, the State sector will convulse itself to avoid ignominy - but will probably do so in a manner that is ineffective and at a cost to its own productivity, agility, sense of integrity and effectiveness.

If there are no consequences, how can the characteristics of stable governance with integrity and commitment flourish in any State agency? Mr Saul confirmed that the procedures and protocols in FÁS. That is the case in most public bodies. Paper doesn’t refuse ink ~ but it is the culture , dynamism, passion and energy of an entity that makes things happen –for better, or worse.

The deliberations of The Public Accounts Committee could therefore result in another ‘grand slam victory’ and have a profoundly positive impact as a consequence of this crisis if the outcome successfully redefines and refocuses FÁS and individuals emerge of the calibre and ambition of those that emerged in The Revenue Commissioners a decade ago. FÁS has been a major by-product of social partnership. Social partnership could also get new life and sense of purpose but the fuel to ignite that will not be found in damp deadwood hidden behind legal fig leafs.

It would, on the other hand, be most disappointing if the enduring outcome of The Public Accounts Committee was merely to record the frustrations, impediments and difficulties in conducting its examination of this matter the only practical outcome is one of Plus sa change, plus c'est la meme chose.

GDP falling and incalculable obstacles to recovery

THE Government is suggesting that the latest data on the performance of the Irish economy, which indicates a contraction so far of 7.4% in GDP, was as anticipated last April when the second Budget was introduced and that a slight increase in merchandise exports of €20.79 billion (+€154 million) from multinational companies in the second quarter reflects an encouraging sign.

One quarter of the merchandise exports comprise computer software that was not incorporated as part of computer hardware or physical media but separately transmitted by electronic means.

Outward direct investment from the International Financial Services Centre was €5.73 billion in Q2.

Some €4.77 billion was reinvested in Ireland by multinational companies and this was combined with an investment €12.56 billion brought directly from overseas.

Exports to EU predominate

The EU is the destination of 63% of Ireland’s merchandise exports and 66% of exported services. 43% of merchandise exports and 39% of exported services are despatched to € countries.  The exhortations of the UK Independence Party in connection with The Lisbon Treaty neatly avoid this fact.

Increasing Dependency

The population of Ireland has risen to 4.45 million, an increase of 38,000 in the 12 months since April 2008 despite the emergence again of net outward migration – of 7,800 persons. The increase is accounted for by a record birth rate. This trend will enlarge the dependency ratio and requirement for resources in education.

Unascertainable impact of Banking Crisis on recovery

The media are absorbed by the ramifications of NAMA. But I find it instructive to view this banking crisis in a broader context because that is what will define our prospects for economic recovery.

The last time the banking system was in relative equilibrium was 2002, the year before the € became our everyday currency and the year before The Financial Regulator was established.

Our GDP, at constant market prices, is likely to have grown by 82.4% from €94.3 billion in 2002 to an anticipated €172 billion at the end of 2009.

Six financial institutions (AIB, Bank of Ireland, Irish Life & Permanent, Anglo, Irish Nationwide and EBS) accumulated customer deposits of €1.025 trillion but they collectively lent €1.543 trillion - €518 billion more than their collective deposits in from 2002 to 2008, financed by money raised on international markets.

The Central Bank provide a sector breakdown of outstanding credit each quarter. While, not surprisingly attention is drawn to the €96 billion owing by the real estate sector and €21 billion owing by the construction sector, the growth in personal borrowing of over €80 billion is bound to hit Skid Row in a deteriorating economy.

The growth in borrowing by manufacturing was quite moderate at under 75% given that it is from this source that exports and employment are generate. The following table sets out the main changes:

The following table illustrates that while Ireland’s GDP grew by 82.4% private sector credit expanded by 175.3%.

	March 2009 € Million	Change 2002-2009 € Million	% Change 2002-09
Agriculture and forestry	5,457	2,304	73.1%
Fishing	386	100	35.0%
Mining and quarrying	575	334	138.6%
Manufacturing	8,571	3,665	74.7%
Electricity, gas and water supply	1,251	423	51.1%
Construction	21,285	16,788	373.3%
Wholesale / retail	14,053	8,776	166.3%
Hotels and restaurants	11,437	6,267	121.2%
Transport, storage and communications	3,347	1,363	68.7%
Financial intermediation	86,164	46,035	114.7%
Real estate	95,987	78,780	457.8%
Education	753	386	105.2%
Health and social work	2,787	2,232	402.2%
Community, social and personal services	2,967	1,773	141.8%
Personal borrowing	136,381	79,978	141.8%
TOTAL PRIVATE SECTOR CREDIT	€391,401 M	€249,204 M	175.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Response of The Financial Regulator

 

The Chairman of the Regulator stated in his 2008 annual report  stated “our strategic approach to regulation was framed in a much more benign environment but that the Regulator had taken steps to slow bank lending, in particular in 2006 and again in 2007”.

 

The first chief executive of the Regulator, Liam O’Reilly, stated in the 2005 annual report “along with the Central Bank, we are concerned about the rapid rise in the levels of indebtedness in the economy and are well aware that if conditions change adversely, many people could be severely affected. We monitor and require institutions to anticipate and prevent risk issues now rather than to have to address problems down the line. There has been much debate about high loan to value ratios in recent days for mortgage borrowers. In this debate, the critical issue is the ability of borrowers to repay the loan in full. It is the responsibility of each financial institution to ensure that their credit standards, provisioning policy and levels of capital are appropriate to provide not only for today, but, in the event of any future downturn in the market. So long as the quality of credit is maintained and the ability to repay is not compromised this is not a problem. We have a responsibility to inform consumers which we are doing through our publications, which set out the risks and benefits of various financial products, including mortgages and personal loans.”

 

O’Reilly’s focus seems to have been more acute when it came to securing his next sinecure.  He became a director of Irish Life & Permanent Plc last September just before a banks that had customer deposits of €12.9 billion was to provide €7.5 billion to masquerade the balance sheet of Anglo Irish Bank on 30 September 2008.  He was presumably recruited as an authentic advocate of financial regulation compliance but in March 2009 the same bank was fined €600,000 by the Regulator for serious infringements.  Does this mean that O’Reilly is as effective as a director of this bank as he was when chief executive of The Financial Regulator.  His ability to control and regulate the imbeciles that took over the asylum as not unlike that of a police riot squad wearing pink bedroom slippers (with ribbons, of course).  The reasons for the fine have not been disclosed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No evidence of any mid-year green shoots of recovery

Today is the first day of the second half of 2009 and the latest data to assess our economic wellbeing does not provide grounds for reassurance, optimism or encouragement.

Employment and Unemployment

One of the great consequences of our EU membership and the economic growth that it enabled was the expansion in employment numbers and in the population of the country. Approximately one million people had a job in Ireland around 1990, a period when all the economic indicators and the level of government debt and the interest liability on it was punitive. Our labour force in March of last year comprised 2.23 million persons. A year later, 1.965 million persons had a full or part-time job in Ireland, a fall of 7.5%. The number unemployed at the end of March was 222,800 - an unemployment rate of 10.2% that has subsequently exceeded 11%. The most worrying aspect is that the long-term unemployment rate has increased from 1.7% last October to 2.2% last March.

There were over 418,000 persons listed on the Live Register at the end of June, an increase of over 197,000 in twelve months. This number includes persons unemployed , part-timers and seasonal workers.

 

Gross Domestic Product

Personal consumer spending, in volume terms, was 9.1% lower in the first quarter of 2009. Capital investment declined by 34.1 per cent in the first quarter of 2009 compared to the first quarter of 2008. This has resulted in a record GDP contraction of 8.5% in Q1 2009.

Anglo Irish Bank

The first Interim Report, since nationalisation, for the 6-month period to 31 March 2009 indicated that the capital base of this wretched bank has been effectively wiped out. There was an instant demand for a €4 billion capital investment by the Government with the high probability that a further €7 billion will be necessary.  The Government parted with €3 billion this week and God alone knows what the owners of that money will ever obtain for it.

This Bank built its business almost exclusively on property development and speculation. The hypothesis upon which it functioned was predicated on its customers achieving a 30-60% cash return on the sites they developed. The ensuing burden eventually mortally crushed the financial spine of struggling house buyers and the taxpaying public are now expected to bridge the enormous and unascertainable gap.

But the taxpaying public have not been introduced to the interplanetary world of bling-incarnate and the faces and the circumstances behind these impaired loans.

The public have been told about a proposed business plan that is intended to:

• Rebuild trust and confidence in the Bank
• Maximise the recoverability of loans, and
• Reduce the cost base

Rebuilding trust and confidence

A fundamental component of trust and confidence is candour, honesty and openness. The conclusion of the protracted but ongoing investigation by the Garda Fraud Squad and the Office of the Director of Corporate Enforcement is an absolute prerequisite.  Bernie Madoff needs some shamrock-wearing, shillellagh-shaking companions from the universe of moral hazard!

Ireland’s contemporary introduction to the concept of ‘systemic importance’ was in 2007 when the palaver was put about which suggested that the massive high-density developments proposed for Ballsbridge, Dublin with projected construction costs north of €1 billion, would ‘have to win planning approval’ because the big property developers were ‘too big to fail’. No consideration was given to the economic sustainability of this development at a consumer level by Anglo and other finance providers. The developer who described economic commentators then as ‘laughing hyenas – harbingers’ of doom and gloom’ has proven to be myopic and certainly not infallible.

Anglo is now a State owned business with a single shareholder. It is no longer a business with 17,111 shareholders’ who owned 89.2% of the equity; - who were fed a bill of fare by your predecessor about “the excellent performance…of a relationship based business … grounded in the Group’s disciplined and focused business model … prudent risk appetite and very limited exposure to areas affected by the current credit market issues”.

 

Maximising the Recoverability of Loans

The most devastating information in the Interim Report is that Anglo Irish Bank, the State-owned bank lent €175 million to 10 directors and 2 managers and that €31 million of this is impaired, against corresponding deposits of only €20 million - €8 million less than a year earlier. This is not merely a debt but it is the stripping away of national self-respect. What other State system of corporate governance would tolerate incumbent directors of major public companies being a party to impaired directors’ loans raised in a bank of which they were directors and appointees to the Risk and Compliance Committee?

The impaired loans of directors and managers of Anglo align Ireland more closely with Harare than with London, Frankfurt, New York or Geneva. What is the difference between the Zimbabwean taxpayers’ picking up the tab for the extravagant shopping trips to Hong Kong and Paris by Mrs Robert Mugabe while their citizens die from cholera? The difference with Ireland is one of scale and disease type. Our liabilities are much greater and our people will die of cervical cancer rather than cholera because resources committed to Anglo are not available for cervical screening.

Secondly, will this incidence of directors’ loans impairment not set a very low ceiling on the prospects of debt recoverability, causing further exposure to moral hazard? Developers will be thrilled and their legal advocates will argue that their client’s obligations should not be dealt with differently, or more urgently, than those of the directors’ and mangers’ who recommended and approved their loans, possibly completed on-site reviews at least twice a year and stress tested the impact of potential adverse consequences.

Religious congregations on whose sites half-finished properties exist will wonder will they ever reap the agreed selling price that was to have been paid on project completion.

Reducing the cost base of the Bank

The bonus culture meant that average salaries at Anglo Irish Bank almost equate in extravagance to the salary and pension combination of politicians. The average salary reported in the Interim Report is equivalent to €96,976 for staff numbers reduced from 1,922 to 1,753. This is a reduction of the corresponding annual figure of over €137,000 in 2006 and 2007.

The average salary estimated to be paid in 2009 in the Department of Finance is €58,600. The average salary estimated to paid, in 2009, in the Office of the Director of Public Prosecutions, who will hopefully be directly involved with former executives of the Bank, is €68,635. The average at Bank of Ireland, a business like that of Anglo, with activities in Ireland, Britain and the US, is €74,426.

When this is considered in the context of there being no value added at the Bank since September beyond dealing with existing customers the overhead seems exorbitant.

Credit Crunch

It is not surprising that as personal consumption collapses through lack of confidence that that demand for credit is also lower. Outstanding private sector credit amounted to €389.6 billion at the end of May.  This declined by €981 million, €185 million of which is attributable to lower personal credit in May. But the overall amount outstanding is equivalent to over  twice the annual level of total personal consumption on goods and services – in other words, a lot of lolly.  That explosion of private sector credit mirrors what occurred in Iceland.

There were 2,203,000 credit cards in issue to individuals in Ireland at the end of May, a number broadly comparable to a year earlier. New monthly spending on these personal cards has moderated from over €1 billion in June 2008 to €801 million at the end of May. The growth in the level of indebtedness of them at the end of May has moderated to 0.1% compared to 4.4% last January and 19.6% in March 2007. Residential mortgages fell by over €100 million in April and by a further €18 million in May, a trend that is not surprising when the number of planning permission sought in Q1 2009 was 23.7% lower than a year earlier.