How would you cope with an annual pension of €1 million +?

The Irish financial institutions dealt with by the Covered Institutions Remuneration Oversight Committee are those that have obtained financial support from the State since 2008. They include AIB, Bank of Ireland, Anglo Irish Bank, Irish Nationwide Building Society, Irish Life & Permanent and EBS. Postbank Ireland had been included but has subsequently ceased to operate.

This CIROC members were mandated to investigate the remuneration of those in charge of these institutions and to recommend pay ceilings to the Minister for Finance – which they did in February 2009.

One facet of remuneration they investigated was pensions. They noted that cash allowances had been paid to compensate for the effects of the ‘pension cap’ imposed by the Finance Act 2006 and that it was unacceptable that pension schemes should be inconsistent with the intent of relevant legislation. The found that top management made little, or no contribution for their own pensions and that in future an appropriate balance was necessary between employee and employer contributions with the former being increased to achieve this balance. They also recommended that bonus payments should not be pensionable and that pension arrangements for top management should be at least broadly similar to those of the generality of staff of the institution.

The pension arrangements of Michael Fingleton, formerly head bottle-washer at Irish Nationwide Building Society were published by the Public Accounts Committee.

Fingleton accumulated a pension fund for himself at Irish Nationwide with assets of over €29 million when it was wound up in 2007 when Fingleton was 67 years old. A pension insurance policy was established for the benefit of Fingleton and other employees in 1975. This INBS pension scheme was originally set up in 1981, 10 years after Fingelton became connected to it. A second which was to directly benefit Fingleton was established in 1995 with the transfer of accumulated assets of €4.5 million too which a further €3.4 million was added in 2005. Various other enhancements, including serial annual pay increases of the order of 8 – 10%, were made throughout the existence of the scheme including an average of the bonus payments over the previous three years. Investments by the scheme by directed by the beneficiary.

The benefits to be provided to Fingleton include:

• His spouse’s benefit was increased from ⅔ to 100% of his pension entitlement
• The final salary, for pension purposes, was to have been the final calendar year salary – including basic salary and an average of the three prior years ‘annual bonus payments.

Fingleton’s remuneration for the final three calendar years of his employment at Irish Nationwide were as follows

Year	Salary	Bonus	Fees	Benefits	TOTAL
2006	738,000	1,000,000	48,000	50,000	1,836,000
2007	813,000	1,400,000	53,000	48,000	2,313,000
2008	893,000	1,000,000	4,000	520,000	2,417,000

His pension would therefore have been based on ⅔ of his final’s calendar year’s salary €589,380 plus ⅔ of an average of his bonus for the final three years of his employment - €528,000 providing him a potential  annual defined benefit pension of €1,117,380.

That perhaps explains why the ‘pre-contracted’ bonus of €1 million has not been repaid. Fingleton’s remuneration from 2003 until his employment at Irish Nationwide terminated was €11, 322,000

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.

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. 

When a Financial Regulator becomes a director of a bank strange consequences seem to occur

WHEN the time arrives to review the history of the current economic crisis some scholar will have to analyse the consequences of regulators’ subsequently becoming directors of companies they once regulated when they leave office.  What contribution is expected of them in a board room?  What impact can and do they make?  Are these appointments even appropriate for a quasi-judicial office holder? 

When a judge retires he doesn’t subsequently become a prosecutor.  If a financial regulator becomes a director of regulated banks is there a danger that an incumbent regulator spends too much effort courting favour with those that are supposedly regulated? Will the anticipated reshaping of the Irish financial regulatory system outlaw this practice to continue or is it only a matter of time before Matthew Elderfield, the newly appointed Head of Financial Supervision at the Central Bank, becomes a director of a plethora Irish banks?

The first chief executive of the Irish Financial Regulator, Liam O’Reilly is a director of two financial institutions that have been heavily fined for compliance failure.

Last month, Irish Life and Permanent Plc was fined €600,000 last month by the Financial Regulator for unspecified breaches in relation to reporting requirements.  Its internal controls were deemed incapable of ensuring the necessary accuracy causing asset values to be overstated.  This outfit has a loan book of approximately of approximately €40 billion of which only 33% is funded by customer deposits – the remainder by a combination of long (29%) and short term (38%) debt, with access to debt curtailed.

O’Reilly became a director of this firm on 12 October 2008 – just weeks before €7.5 billion walked out the door to illicitly prop up the balance sheet of Anglo Irish Bank Plc

Merrill Lynch has been fined €2.75 million by the Financial Regulator.  Two incidents, one in December 2008 and the second in February 2009 led to losses of $456 million in Merrill Lynch International Bank Limited.  A second incident between May and August 2009 caused a loss of $5.3 million.   O’Reilly became a director of this company in March 2007.

The Financial Regulator indicated that the breaches were a consequence of a failure to have in place well defined and sufficiently transparent lines of supervisory responsibility and a failure to oversee a traders activity because the month-end price verification process was inadequate.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIB 2009 Interim Results – another ghost to haunt the ‘Hall of Shame’

It never ceases to amaze me how these devious hypocrites that run banks present results against a context of factors that are inflicted on them and the existence of which have nothing to do with their own delinquency.  It is as though they are the hapless victims of injured innocence.

The 2009 Interim Results at AIB are the latest case in point.  They report an operating loss of €872 million compared to a profit of €1.27 billion in June 2008. Deposits are down to €83 billion from a high of €93 billion in December 2008, having been €81 billion in December 2007.  No less than 37% of the AIB loan portfolio is in construction and property; a further 24% in residential mortgages – amounting to €31 billion in Ireland. Of this €31 billion, only €14.6 billion is declared ‘satisfactory’; the remainder is either impaired, vulnerable, or ‘on watch’. 

The Ireland impaired element relates to 13 contractors while the vulnerable and ‘on watch’ element relates to 74 contractors.  The small number of individuals involved there must have meant fabulous savings on the annual AIB Christmas card circulation.  The property and construction loans criticised are 67% of all Irish loans, while the land and development loans criticised are 74% of all Irish loans in this category.

The amount of impaired residential mortgages in Ireland has more than doubled from €148 million last December to €322 million.  AIB has a home mortgage book in Ireland of €26.5 billion and the outstanding value of all home mortgages at the end of June 2009 was €148.1 billion including securitized mortgages, according to Central Bank data.

A mere 5% in manufacturing and 11% in services.  The AIB search for authentic value-added opportunities knew no bounds.

The diabolical outcome is attributable to a Pandora’s Box of explanations -  “recessionary conditions continuing”, “weak customer loan demand”, “assets quality weakens” etc etc as if the management of this wretched bank was not the central architect of much of this mess along with Bowler’s Irish Life & Permanent and Boucher’s Bank of Ireland, the yahoos at ACC, Fingleton’s Irish Nationwide Building Society and EBS.  At least the chairman of EBS, Mark Moran and the finance director, Alan Merriman promptly resigned in March after their genius resulted in a loss of €32.8 million at EBS in 2008.

Sheehy advises that “overdependence on the construction industry is rapidly diminishing”.  Oh dear, how come?  This junkie must be on a 12-steps recovery programme because the construction industry was bloated to death by all the Irish banks and their hero, Sean Fitzpatrick.   Boucher almost climbed a tower crane to advocate on behalf of Sean Dunne’s planning application for Ballsbridge and Bowler’s so sad outfit provides a subversive deposit in Anglo Irish Bank so that the mascara in its 2008 annual report did not run.  The moral I guess is that you cannot make money from a corporate corpse, unless you’re an undertaker. 

Sheehy, in a display of low peasant-cunning,  remarks about the ‘solid operating performance’, even though operating profit in Ireland is down 33% to €394 million and bad debts amount to over €1.9 billion!  Yikes!!  He reports impaired loans in Ireland of €8.51 billion – 10.9% of advances and a provision against profit of €1.79 billion in respect of these. There is a provision of €17.1 billion in respect of development and land in Ireland.  He concludes by telling his shareholders and the Irish taxpayers who were obliged to provide €3.5 billion that future prospects are enhanced by “a firm resolve to manage our business efficiently”.  What bishops gave him that line – because he and his blundering band of incompetents have certainly sodomised the Irish economy - one more medallion in the AIB Hall of Shame:

March 1985: Insurance Corporation of Ireland €357 million bailout
(CEO: Gerry Scanlan)

May 1988: 2.2 million Dana Petroleum shares, failed share issue; underwriting loss – shares put into staff pension account (CEO Gerry Scanlan)

October 1990: Internal Auditor of AIB reassigned and to report to Brian Wilson, General Manager for Ireland (CEO Gerry Scanlan)

February 1991: DIRT evasion exposed and denied. £90 million settlement in 2000 (CEO Gerry Scanlan)

1989 – 1996 Faldor Investment scam - £48,000 in artificial deals connected to AIB Investment Managers’ own funds

April 1998: media report that AIB had 53,000 bogus non-resident accounts (CEO Tom Mulcahy)

June 2002: $691 million foreign exchange fraud perpetrated at Allfirst, an AIB subsidiary in Baltimore, Maryland (CEO Michael Buckley)

2004: Overcharged on the purchase of 3 million foreign drafts; cost of refunds €50 million Other overcharging episodes related to variable rate mortgages (Surplus Builder), 34,000 student and graduate loans, overdraft limit amendment fess affecting 24,000 customers, charges connected to the early termination of finance and leasing transactions affecting over 900 customers, to mentioned just some.  (CEO Michael Buckley)

March 2006: Scanlan and three other senior AIB executives cited by the Revenue Commissioners for income tax evasion.

Of course, the hinges on the Hall of Shame were crafted from the ‘special relationship’ between AIB, Charles Haughey and Des Traynor.

‘You scratch my back and I’ll scratch yours’

The board of Anglo Irish Bank that created the debacle that led to its nationalisation, – chronic losses, impaired directors’ loans and the elimination of its equity, contains an interesting set of mutually beneficial relationships.  What is particularly noteworthy is the cosy, intimate nature of these relationships is that they are seemingly blind to the most appalling violation of public trust committed by Sean FitzPatrick, the former chairman of Anglo until he resigned, in disgrace, from all board positions on 18 December 2008.  But the unctuous tributes would make a casual observer believe that a saint was being celebrated, not a flamboyant spiv who has destroyed the reputation of a proud nation.

He disclosed that he he concealed tens of millions of € at Irish Nationwide Building Society to conceal the existence of personal borrowing from Anglo Irish Bank from the contents of the Bank’s annual report and he also inveigled Bowler’s Irish Life & Permanent Plc to deposit €7.5 billion at the end of September 2008 in Anglo to appear to boost the deposit base of the Bank.  The Tier 1 capital at Bowler’s bank was a mere €4 billion and, coo, shucks, she didn’t know nothing about this deposit beforehand, notwithstanding that her fellow director, Danuta Grey, was a contemporaneous director of Aer Lingus with, guess who – FitzPatrick. 

 

Greencore Plc

                               FtizPatrick became a director of Greencore Plc on 1 January 2003 and the Chairman of Greencore, Ned Sullivan, was a non-executive director of Anglo since 12 November 2001. 

The following summarises the fees’ aspect of this episode of mutual back-scratching:

 

	Sullivan’s fees at Anglo Irish Bank €	FitzPatrick’s fees at Greencore Plc €
2002	42,000
2003	70,000	30,000
2004	74,000	43,000
2005	75,000	45,000
2006	93,000	48,000
2007	108,000	48,000
2008	147,000	51,000
TOTAL	€609,000	€265,000

 

Sullivan was a member of the 3-person Risk an Compliance Committee at Anglo in 2008.  This Committee would have risk evaluated directors’ loans amounting to €175 million, of which €31 million are impaired since nationalisation and approved loans to property interests that account for losses of over €4 billion in the half-year to 31 March 2009 and the moral hazard associated with this.

Sullivan, in his chairman’s statement in the 2008 annual report of Greencore Plc eulogises FitzPatrick, as follows:

“In December 2008, Sean FitzPatrick resigned from the Board.  Sean has been a key contributor to the Board for six years during a period of significant change for the Group.  The Board would like to thank Sean sincerely for his valued input and wise counsel which has contributed greatly to the growth and development of the Group during that period".”

Greencore Plc YE: September 26	2003 – €(000)’s	2008 €(000)’s
Sales	1,448,996	1,308,097
Profit after tax	57,655	46,152
Share price	€2.70 (31 Dec 2002)	€0.95 (18 Dec 2008)

 

Smurfit Kappa Plc

Gary McGann, chief executive of Smurfit Kappa had been a director of Anglo Irish Bank since January 2004 and FitzPatrick joined the board of Smurfit Kappa on 20 March 2007.  The following summarises the fee trawl:

 

	McGann’s fees at Anglo Irish Bank €	FitzPatrick’s fees at Smurfit Kappa €
2004	43,000
2005	65,000
2006	72,000
2007	92,000	250,000
2008	124,000	300,000
TOTAL	€396,000	€550,000

 

At 30 September 2008 Sullivan owned 440,084 ordinary shares in Anglo Irish Bank and McGann owned 5,900 ordinary shares.  McGann was a member of the Audit and Remuneration Committees.

The Chairman of Smurfit Kappa is Liam O’Mahony former boss of CRH Plc, and in his statement in the 2008 annual report about FitzPatrick was “I would like to thank all of the Directors for their contribution to the development and effectiveness of the Board and its various Committees.”  The Remuneration Report formally noted that FitzPatrick resigned from the Board in December 2008.  Is this not a perfectly dignified and appropriate way to deal with this matter!  No empty platitudes, no peasant cunning! 

 

Aer Lingus Plc

FitzPatrick was appointed to the board of Aer Lingus in 2004 when it was a state enterprise.  He received a fee of €13,000 in 2005 and €18,000 in 2006.  The airline became a public company in September 2006.  Non executive directors’ fees at Aer Lingus were tripled from €18,000 to €45,000 immediately following the IPO.

Colm Barrington, Chairman of Aer Lingus, in his statement in the 2008 annual report would almost fill a spinnaker with the effusiveness of his eulogy of FitzPatrick “In 2008 Sean FitzPatrick resigned from the Board.  Sean served Aer Lingus extremely well and had a significant and positive influence on the company both before and after the IPO.”  Of course, given a share price of €0.59!  Fees paid to professional advisors in connection with and subsequent to the IPO at Aer Lingus were close to €60 million.  The cumulative loss recorded since the IPO is €72 million.  Enchanting!

Moral hazard of nationalising Anglo Irish Bank

The response of many prominent Fianna Fáil politicians to the result of the elections last Friday was to plead for more effective communication of Government actions. The saga of Anglo Irish Bank must provide a specimen illustration of ineffective communication.

It was nationalised on January 15^th, less than a month after the abrupt resignation of former Chairman, Seán FitzPatrick, fellow director, Lar Bradshaw who has been the Government appointed director of the Dublin Docklands Development Authority, David Drumm former Group Chief Executive, William McAteer, Group Financial Director and Chief Risk Officer, to mention but a few. McAteer is a former partner of PricewaterhouseCoopers. The current chairman of the nationalised bank was managing partner of that firm for a number of years. But the Government has failed to educate and convince the public that maintaining Anglo is in the national interest.

John McManus, has written a very compelling article in today’s edition of The Irish Times that argues the time has come to shut Anglo Irish Bank for good and the argument that it is too costly to close it is false.

No State money was invested since nationalisation but the begging bowl is out now. When the 6-month report to 31 March was issued on 29 May there was an immediate demand for €4 billion of additional capital. It was also signalled that further losses of €3.5 billion are anticipated. Anglo had assets of €101 million when it was nationalised. But the results at 31 Mar have diminished to €88.5 billion in a matter of 75 days since nationalisation.

The nation's capacity to bail out zombie banks is not infinite, nor is there much faith in their capacity to redeem themselves without extensive changes at the top. The National Pension Reserve Fund was valued at €15.5 billion on 31 March, having lost 30.4% of its value in the previous year. €7 billion of this has been invested in AIB and Bank of Ireland and if €4 billion is to be immediately committed to Anglo and a further demand for €3.5 billion is lurking in the shadows, the nation's sovereign wealth will amount to a mere €500 million.

The incidence of moral hazard is never far away when a fairy grandmother emerges to bail out an errant entity, and the former discipline of the stock market no longer prevails. It has emerged that Anglo made loans of €175 million to 10 directors and that €31 million of these are impaired. Would this impairment arise if the State was not involved and the stock market had to be impressed by the prowess of the business?

Apart from FitzPatrick who owes €106 million, Bradshaw, Drumm and McAteer the former directors were Tom Browne, Fintan Drury, Noel Harwerth, Anne Heraty, Michael Jacob, Gary McGann, Ned Sullivan, Declan Quilligan and Pat Whelan.  The former board received emoluments of €11.5 million in 2008, a slight reduction on the €12.9 million doled out in 2007.  But these far-sighted people decided that, had they remained, fees for non-executive directors would have been reduced by 20%!

This success of nationalisation is predicated on maximising the collection of outstanding liabilities. What signal is conveyed by a high incidence of impairment in the directors' loan account? There should be no directors loans whatsoever outstanding in a nationalised company.

The immediate call on State support of €4 billion immediately, is apparently to be made before the investigation of the Garda Fraud Squad and Office of the Director of Corporate Enforcement is completed. Impaired loans amount to €10.7 billion and a further €12.9 billion are deemed, at this stage, to be 'past due, but not impaired'. But they could be against this background. Loans of over €300 million, provide by Anglo to its own customers to buy Anglo shares, are now impaired and await the pleasure of the Irish taxpayer.

The cost of running Anglo Irish Bank, now a State enterprise is exorbitant. The average salary for the 1,753 employees for six months was €48,488 (equivalent to €96,976 per annum). A comparison with those public entities that engage with Anglo reveals that the average salary at the Department of Finance in 2009 will be €58,601, while the average salary of staff in the Office of the Director of Public Prosecutions is anticipated to be €64,946.

The Minister for Finance advised that nationalisation would mean "drawing a line under past activities". As the Minister is the only shareholder, why was it even necessary to engage a public relations firm in connection with the publication of the first interim statement since nationalisation? If the intention is to signal the drawing of a boundary with life under the ancient regime, why would the new board of directors and not be bold enough to 'go for change' rather than choose Drury Communications, a public relations firm established by Fintan Drury?  Drury was a former director of Anglo Irish Bank until June 27 2008. He was paid €85,000 in 2008 as a retainer to attend 4 board meetings and 6 meetings of the Anglo Risk and Compliance Committee and 2 meetings of the Nomination and Succession Committee.  Surely there is some due out of a staff of 1,753 that could coherently articulate what is happening, or have all those with these qualities already resigned?

The Government has not done enough to convince the public of the systemic importance of either Anglo Irish Bank or Irish Nationwide Building Society. The McManus article suggests that since it is most unlikely to redeem its reputation. Customer funding has dropped from €47.8 billion on 30 September to €34.1 billion on 31 March – driven by “a market wide aversion to risk”. But is also reflects the decrease of €7.3 billion of customer deposits received from Bowler’s Irish Life Assurance Company that was designed to hoodwink stakeholder at the end of the last financial year – 30 September 2008. 

Customer lending, to existing customers, increased fractionally from €71 million to €72.3 million and €700 million of this concerned capitalised interest and the roll-up of other interest outstanding.  Basically it is a matter of endemic stagnation combined with a ruined reputation and an open-ended drain on public funds.

Ireland’s credit rating was reduced on June 8th to AA negative by Standard & Poor’s on account of the fiscal cost of weakening bank sector asset quality.

Irish Life and Permanent board: should they be endorsed for anther year of brilliant stewardship?

It is outrageous and unconscionable that the board of a bank that has presided over appalling performance that has squandered shareholder wealth and mugged the taxpayers of Ireland for critical support to sustain the business, should even consider seeking a renewed manadate. But that is precisely what is to happen at Irish Life & Permanent Plc.

99% of the 135,484 shareholders in Irish Life & Permanent Plc (IL&P) are holders of 5,000, or fewer, ordinary shares but they only control 21% of the total equity. All shareholders will have an opportunity to have their voice heard at their version of Dance Hall Q's and Hucklebuck Shoes, also known as the AGM, on 15th May at the RDS and voice their pained reaction to:

• An 86% collapse in share price



• Abandoned dividends



• The rogue deposit in Anglo Irish Bank after the Government bank guarantee covering deposits, senior unsecured debt and asset-covered securities was announced



• Losses of €122 million arising from transactions with Lehman Brothers and an Icelandic bank
  
  


• Customers unable to obtain personal or business credit
  

A share price of €11.89 meant that the value of IL&P at the start of 2008 was €3.28 billion. A share price of €1.60 at the end of 2008 meant the group was worth €443 million, a drop of over 86%. The corresponding drop in share value at Bank of Ireland and AIB in 2008 was greater. The appetite for shares in Irish financial institutions is severely impaired by the ambiguity connected to their extravagant property loans.

The calamitous drop in wealth and absence of income is devastating for so many but the implosion of pension funds is crucifying a huge number of pensioners whose providence was meant to equip them to be wholly independent members of what is now referred to as the coping class. But it was the €7.3 billion deposit in Anglo Irish Bank at the end of September 2008 by Irish Life Assurance Plc, apparently without the sanction of the board of IL&P, that has fatally destroyed the reputation of this group, which was once hailed as an emblem of providence and prudence. They must have all been fast asleep in their showband bus after a late night gig in Claremorris and the roadies decided it was better not to disturb them!

This AGM is to take place without any explanation of this transaction and it defies credibility that the existing board members, with one exception, are seeking election on a platform of astute, unrelentless, brilliant but light-touch, vicarious stewardship. Wow!

Many are curious as to how a modest-sized institution, which IL&P is, could be in a position to invest such an enormous sum outside its business. The core capital of Irish Life & Permanent is of the order of €4 billion. Could this have been compromised by this transaction?

Cash balances at 31 December 2007 were €253 million but dropped to €200 million at the end of 2008. IL&P was more depndent on debt funding in 2008 than previously. It had to raise €1 billion through an internal transaction with Irish Life Assurance to support its own bank in the middle of 2008. Irish Life Investment Managers that none of its clients assets were utilised in the Anglo Irish transaction. How could the board not have been made aware of what was going on by the chief risk officer both in the context of scale and context?

If IL&P did not have access to cash resources of €7.3 billion was cash provided through another Irish bank and, if so, which one?

If the transaction did not involve cash changing hands but was based on some form of IOU, does this introduce a fraudulent consideration with a possible criminal case to be answered?

Are the incumbent board members motivated by narcissism? Perhaps the prospect of sharing close to €1 million in fees to attend 9 meetings cannot be disregarded. But a dispassionate observer might opine that this particular showband ought to have performed The Hucklebuck for the last time and that an encore was unnecessary, given that the curtain hem of credibility is already dropping close to floor level.

One of those seeking the trust of the shareholders is former Financial Regulator, Liam O'Reilly one of whose other sinecures is chairman of the Chartered Accountants Regulatory Board. The bean counters are investigating the role of former finance director, Peter Fitzpatrick, in the Anglo Irish Bank transaction. Will we see the cronnies tripping each other up?

There are occasions when the reputation of an entity is so compromised that the prospects of redeeming it without a change of personnel is even less promising than the prospects of Leitrim winning the Sam Maguire Cup. I don't even think that if Gillian were to don a Tina Turner wig and belt out a rendering of Simply the Best would change the mood of angry shareholders. Her eforts, I’m afraid, would be in vain, if the institutional cronies fail to hunt in a pack.

Banks' bailout: Is the Irish taxpayer blinded by optimism?

Now that the National Asset Management Agency (NAMA) has been inaugurated, is the taxpayer being asked to approach the resolution of the banking crisis on the basis of a blind act of faith? The challenge is admittedly both complex and enormous, with many uncertainties although the idea of taking over portfolios’ of loans, good and bad, is an encouraging feature. The cornerstone of success is dependent on property development borrowers repaying loans in full, over an agreed time or by forcing the sale of their mortgaged collateral property assets at a time and on a basis that yields the State a profit above the loan balance due.

There have been references to the approach of the Swedish Government to their real estate induced financial crisis in 1992. But there are important differences to that currently prevailing in Ireland with respect to the scale of the problem and the level of national indebtedness.

Private sector borrowing in Sweden increased from 85% to 135% of GDP in the five years prior 1992. Private sector borrowing in Ireland has increased from 136% to 214% of GDP between 2004 and 2008. The Swedish Government was obliged to commit a sum equivalent to 4% of GDP (around €14 billion) towards the rescue with a net cost equivalent to 2% of GDP when the crisis abated and profit on the sale of assets realised. The estimated toxic loans arising in Ireland remains uncertain but if they are €90 billion, this is equivalent to 50% of our shrinking GDP.

The Minister for Finance, Brian Lenihan TD, intends to visit the financial centres of Europe as a confidence boosting measure and confidence needs to be restored rapidly of credibility is to be reinstated. His audience will seek explicit answers. Our profligate banks increased private sector credit by 97% to €393 billion since 2004 on terms that no competent Financial Regulator or Government ought to have tolerated. Current economic conditions and the confiscation of substantially more income in the form of taxes and levies following the Budget, aggravate the prospect of timely repayments being made on loans that should have never been approved.

Will the Minister be able to tell his audience that an orderly and complete change in the board of directors’ of each of the supported banks will commence not later than the 2009 annual general meeting of that bank? Will be able to demonstrate confidence in the risk management competency and procedures of these banks against a background where the risk process at Irish Life & Permanent did not escalate details of the €7.5 billion investment in Anglo Irish Bank to the board before this transaction was executed? How will the Minister be able to convince these audiences’ of Ireland’s capacity to recover its prosperity and solvency because, unlike Sweden, we do not have an abundance natural resources or an equivalent indigenous industrial base?

If some of the supported banks or building societies, following a downward revaluation of the assets held as collateral for loans are not likely to return to profitability in the medium-term, will they be closed or merged sooner rather than later?

There must be transparency if the taxpayer is to repose trust in these measures and those who brought about this crisis must bear the cost of their malevolence promptly.

Chartered Accountants Regulatry Board Widen Probe - But Is There A Conflict of Interest?

Yesterday, I read with keen interest that the Chartered Accountants Regulatory Board (CARB) is to extend the scope of its Anglo Irish Bank investigation to encompass the €7.45 billion deposited by Irish Life & Permanent Plc in Anglo, a gesture that had the potential of irrationally inflating the latter’s equity price at fiscal year-end, last September, just as the Irish Government guarantee of bank deposits became effective.

Mr Purcell, the former Comptroller & Auditor General is universally respected as a thorough and impartial investigator. I don’t personally know the Chairman of CARB, Liam O’Reilly, but I would be astonished if anybody were to infer that he is other than a man of the utmost integrity and probity. The comments I am about to make concern the juxtaposition of his circumstances and not his character.

Dr O’Reilly was appointed the first chief executive of the Financial Regulator on 1 May 2003 having previously been and assistant director general at the Central Bank. He was appointed the first chairman of CARB when it was established in 2007. He was appointed a director of Irish Life & Permanent Plc on 3 September 2008 and was therefore a director when the issue under investigation took place; when the board IL & P met for 7 hours late on Thursday, 12 February, but failed to fire the chief executive and chairman – presumably relying on the oft-spoken defence of “I’m a fighter, not a quitter”, in the case of the latter.

How can CARB credibly conduct this investigation when its own chairman is a director of the company being investigated and the subject of the investigation is of such a grave order of magnitude that it is tantamount to national economic treason? How, for that matter, could any member of the board of CARB be concurrently a director of any business where a chartered accountant’s professional behaviour is the subject of a special investigation? The eyes of society and not just the profession, the shareholders, those whose pensions funds comprise shares in Irish Life & Permanent and its customers will be scrutinising the findings of Mr Purcell in refined granular detail - if they are published by CARB.

Ireland has wilted under the tyranny of crony capitalism. Germans’ refer to Ireland’s financial services industry a ‘the unregulated wild west frontier’. Who can blame them when it appears that the financial services industry is ungoverned and ungovernable and the Government almost appear to be crawling on their hands and knees in deference to the banks?

Concealed directors’ loans, involving hundreds of million of € over many years without the interception of the Regulator, or its CEO being properly informed by his own staff; the facilitation of tax evasion, of epidemic proportions, by thousands; DIRT evasion on an enormous scale; illicit overseas retail deposit accounts; widespread insidious random overcharging of bank customers and, in the case of AIB, less than €1 million of an estimated €75 million overcharged actually refunded 8 years later; bank development funding of such a magnitude that it imploded the Irish economy after the unsustainable inflation of property prices; a Regulator accused this week at an Oireachtas committee hearing of not acting promptly on the findings of a bank’s group internal auditor, internal auditors demobbed by bank chiefs who, in at least one instance, was subsequently cited by the Revenue Commissioners in March 2006 for six-figure personal tax evasion, obscene levels of remuneration, in some instances without the evident sanction of a properly constituted remuneration committee, personal pension fund aggrandizement by senior executives, 'know-nothing' boards of directors, a Central Bank whose 2007 warnings of economic doom are ignored, the absence of corporate governance standards in a building society, loan approvals personally fast tracked at a high level, without normal documentation, to facilitate compromised politicians, – to mention just a few.

These ‘unforced errors’ have resulted in derisory equity values, no dividends, collapsing personal wealth and the urgent need for the State to confiscate what’s left of personal wealth to compensate for billions of tax revenue, unavailable from previous sources.

To cap it all, citizens are affronted by a recently appointed bank chief executive, an insider crony-appointment, who not just lent excessively for potentially hideous commercial development but then personally advocated with the planning authorities, that the skyline of Ballsbridge should emulate that of Dubai, in order to inflate his grotesque bonus - even further. Perhaps this person is domiciled in a wigwam in Wicklow and, hence, perhaps his perspective of the sky is one that is not shared by 99.9% of the civic minded.

If CARB wishes to be recognised as a pillar of society it needs the profile, stability and independence of an ancient pantheon. If it fails to assert this it will become just another conspirator, in the well established tradition seen so frequently in Ireland that emulates the extravagant imperiousness adopted by the heads of minor African nations.

CARB has a solemn obligation to the 17,000 members of the Institute of Chartered Accountants in Ireland and especially to the young professionals who are being flung from, what was to be their promising careers, at KPMG, PricewaterhouseCoopers, Deloitte and other firms - as a direct consequence of crony capitalism and many have no prospect of imminent alternative employment outside the fast-food retail sector. Dr O’Reilly does should therefore be prevailed upon not to multi-task with the seamless facility of the late Jimmy O’Dea at the Gaiety Theatre Christmas pantomimes in the early 1960’s.

If society percevies that the 'game warden' is also a 'poacher', the efforts of Mr Purcell may well take on the enduring significance of an episode of The Jerry Springer Show or The Dukes of Hazard!

Liam O'Reilly the first Irish Financial Regulator is a busy man

The first chief executive of the Ireland's Financial Regulator, Liam O'Reilly, is a busy man these days at the age of 61.

He has been a board member of Irish Life & Permanent Plc (IL & P) since early September 2008. His appointment was inspired by his "long experience in financial services, public administration and economic and monetary policy in Ireland and at EU level", according to Chairman Gillian Bowler in welcoming O'Reilly.

However, O'Reilly arrived at IL & P just in time for the transaction described as the €7.9 billion in 'exceptional support' to Anglo Irish Bank was executed. The source of these funds is being investigated by the Irish authorities including the Financial Regulator, the Director of Corporate Enforcement and the Garda Fraud Squad.

Bowler, admitted on March 4th this transaction was wrong; that her board knew nothing about it, that if they had, they would not have approved it. But they have not fallen on their swords, despite great unease among the staff and society-at-large - yet.

Mr O'Reilly became the first Chairman of the Chartered Accountants Regulatory Board (CARB) in April 2007. This Board supervises the "to regulate its members, in accordance with the provisions of the Institute's bye-laws, independently, openly and in the public interest".

This CARB appointed the former Irish Comptroller & Auditor General, John Purcell, on 19 February to undertake an investigation into the issue of dirctors loans at Anglo Irish Bank.

Loans to the former Chairman of Anglo Irish Bank, Sean FitzPatrick, for an 8-year period resulted in FitzPatrick's resignation from this position on December 19th as well as his resignation from the boards of Aer Lingus and Smurfit Kappa. The loans outstanding amounted to €83 million in 2008 and €122 million in 2007. These are the very loans which the staff of the Financial Regulator discovered when conducting sn examination of the books of Irish Nationwide Building Society in early 2008 but neglected to tell their boss, the last Financial Regulator, Pat Neary, in sufficient time for him to protect his position. Neary resigned from as Financial Regulator on January 9th.

If that was not enough to keep a man busy Liam O'Reilly is also a director of Merrill Lynch International Bank based at the IFSC. It was disclosed on 6th March that the Financial Regulator is investigating a possible rogue trader case involving an employee at the London branch office of this bank since February 18 relating to the 'mis-pricing of trades'. The NY Times reported that a FX trader may have lost more than $120 million and tha several hundred million dollars could have been lost on derivative trading - MLIB earned pre-tax profits of $860 million on reveues of $2.6 billion in 2007 before the financial tide turned for its parent.

Bank of America acquired Merrill Lynch on 15 September 15th 2008 for a €50 billion all-stock transaction that was "intended to create an entity that would become the leading financial institution in the world based on a great global franchise"

However, just a mere 4 months later, on 21st January 2009, the former boss of Merrill Lynch, John Thain, resigned following a fourth quarter loss in 2008 of $15.3 billion, - $553 million more than Bank of America expected it to lose when it acquired Merill.

Thain was a man with extravagant tastes and spent $87,000 and $68,000 on a sideboard when refurbishing his office last year at an overall cost of $1.2 million. Thain had suggested to his fellow directors the previous month that he be paid a $10 million bonus for the period since he became CEO of Merill in December 2007. He had already received a $15 million bonus in cash when he joined Merrill and a salary package anticipated to yield from $50 million to $120 million over several years.

The US Government has provided $45 billion in bailout money to Bank of America. Apart from selling 3 corporate jets, it is also selling a Merrill Lynch helicopter and has confirmed that no bonuses will be paid to Bank of America executives last year and the remuneration of its chief executive has been slashed by 60% to $10 million.