EBS @ 75 facing extinction as a mutual society

If Alec McCabe, the founder of the EBS Building Society what would he make of it as it celebrates the 75^th anniversary of its foundation with the threat of State control pending?

There had been over 20 building societies in the country when McCabe embarked on his venture which was intended to enable civil servants and teachers buy houses because there were no other sources of finance available to them in the early 1930’s. The EBS was to grow its membership to the current level of approximately 440,000.

Merriman and Moran Legacy

While close to 89% of its lending has been in the form of residential mortgages for owner-occupiers, EBS had a €2.4 billion commercial loan book that is a lending catastrophe. Its commercial lending activity began in 1991 but when it recruited a Alan Merriman, a 38-year old former partner and 17-year veteran at PricewaterhouseCoopers, in July 2005, its commercial lending activity intensified and included €500 million lent for land development.

Merriman had executive responsibility for commercial lending. Commercial lending and this was focused on 500 high net-worth individuals and was based on what they describe as ‘property relationship banking’ with many of the transactions in United Kingdom and continental Europe, especially Germany.

The EBS was also burnt badly by the shenanigans of some of Ireland’s many, many rogue solicitors.

By 2008 EBS lending to the commercial sector ceased. The €500 million development land loan book had incurred a loss of €38 million after impairment charges of €110 million. There was also a €95 million bad debt, of which €69 million related to development finance. Furthermore, there was a €15 million impairment charge in respect of a €16 million loan to the then recently nationalised Icelandic bank, Kaupthing.

By 2009, EBS lost a further €78.8 million. It set aside €913 million of its loans for sale to NAMA. The first €144 million tranche of these attracted a 37% discount implying that the discount on the total shipped to NAMA could be €340 million.  The cumulative profit earned by the Society during the tenure of Moran as Chairman and Merriman as Financial Director was €35.7 million.  The cumulative profit in the preceding four years, 2001-05, was €196.7 million.

The Financial Regulator also mandated that Tier 1 Capital was to be 8% and the impact of this is that EBS needs €875 million in additional capital before the end of 2010. Private sources have been unwilling to provide this which means the State is once again the purse of last resort and the State will control the building society.

Alan Merriman and Mark Moran, resigned in 2009. While Moran pocketed €45,400 for his five months service to 29 May 2009, Merriman scooped the jackpot.

Merriman resigned on 10 March 2009. The Department of Finance published the recommendations of the Covered Institutions Remuneration Oversight Committee on 27 February. The CIROC was set up after the Government guaranteed bank deposits and began providing massive public resources to shore up their inadequate capital bases.

The CIROC recommendation for EBS was the chairman would be paid €144,000; the chief executive would be paid €360,000; an ordinary board member would be paid €29,000 and a board member chairing a major sub-committee of the board would be paid €36,000. The salaries of individuals’ reporting to the chief executive were to have been adjusted downwards to reflect these changes.

Merriman, on his departure in March 2009, was paid €629,700 that included an additional a contractual 12-month notice period payment and he was also paid €851,400 as a contractual termination payment. His base annual salary in 2008 was €479.700. Merriman’s pension was also adjusted to include additional service for pension purposes. The foregoing would seem to completely and totally ignore the CIROC recommendations on executive salaries mandated by the Department of Finance.

Fergus Murphy

Fergus Murphy has been the chief executive of EBS since early 2008. Despite the calamitous debacle that he inherited, Murphy was paid €505,800 including a base salary of €465,000 in 2009 – not the €360,000 recommended by CIROC. The Annual Report states that he took a 22% voluntary reduction in base pay effective 1 October 2009. Like the speed limit on Burlington Road, where EBS headquarters is located, the CIROC recommendations are supposedly mandatory, not voluntary!

Cathal Magee

Cathal Magee, the person nominated to be the next chief executive of the HSE has been a director of EBS since 2002. He became a member of the Risk Committee in 2003 and has been chairman of that Committee since 2003 and Chairman since 2005. His cumulative fees amount to €314,500 and, significantly, were €10,500 in excess of Department of Finance guidelines in the case of his 2009 fee.

Alec McCabe would see little to celebrate on the 75^th anniversary of the founding of EBS. He would see its slogan ‘where family counts’ certainly find expression when it comes to the executives of EBS taking care of themselves, notwithstanding the carnage their decisions caused to hundreds of thousands of others.

When the imbeciles took over the asylum …

I HAVE exchanged some correspondence recently with Fergus Murphy, Chief Executive of EBS about the fundamental accuracy and the disingenuous spin of the EBS DKM Affordability Index. 

The EBS is one of the financial institutions covered by the Government Deposit Guarantee Scheme and is believed to be  about to seek several hundred million € from the taxpayers’ to support a severely weakened capital base.  Former Chairman Mark Moran and former Finance Director, Alan Merriman, resigned abruptly earlier this year following losses and loan impairment charges that arose through commercial property speculation.

This Affordability Index is aimed at first-time buyers on an average income.  The latest iteration contends that since house prices have fallen that

“affordability for house buyers has increased substantially over the past year”. 

65% per cent of the 483,000 claimants of mortgage interest tax relief in 2006 were either single men, single women, widowers or widows.  Their average income was under €59,000 so the maximum home loan they could safely sustain was €147,500 and the maximum price they could afford to pay for a house was €164,000.  Affordability, in the eyes of EBS, would have to be based on a very high gross income : loan ratio, which is why the transaction is simply not affordable.

The tragic, but irrefutable, fact is that the average Irish mortgagee has not been able to afford any house in Ireland since the end of 2002. The outstanding level of total Irish residential mortgages provided to Irish residents by all providers increased from €43.41 billion then to its current level of €148.2 billion. But the underlying income to sustain this mountain of debt increased from €18.6 billion to €28.1 billion in 2006, before the consequences of economic collapse gained traction.

The imbeciles had taken over the asylum when it came to the provision of residential mortgages in Ireland since 2003. The self-important flaccid wimps in charge of these financial institutions’ tolerated an income-to loan ratio increase from 2.33 to 5.27.  The Financial Regulator passively observed this debacle unfold and was ineffective and impotent to defend the borrower against the buccaneering lending practices.

A total of 540,000 mortgages worth €114.4 billion have been paid since 2002.  These properties are now experiencing the consequences of negative equity and the impact of this on ‘affordability’ as well as sustainability.

The most recent Monthly Economic Bulletin from the Department of Finance provides a rational basis for understanding affordability.

House Type and Location	Average Price €	Year-to-year change	90% Mortgage	Minimum necessary gross income €
Average new house, outside Dublin	255,029	-18%	230,000	92,000
Average second-hand house, outside Dublin	292,029	-17.3%	263,000	105,200
Average new house, Dublin	290,402	-27%	262,000	104,800
Average second-hand house, Dublin	380,965	-17.6%	343,000	137,200

The average income of a mortgage interest tax relief claimant in 2006 was €59,190. The only buyer category for whom affordability has improved in the past year us a cash buyer.  But that buyer does nothing to transform the 2008 EBS loss of €37.8 million into profit or reduce impairment losses of €110 million.

The DKM EBS Index is cited by the Irish Home Builders Association to imply that a single person with an annual gross income of €44,000 and a married couple with an annual gross income of €82,686 could afford to sustain a mortgage of approximately €230,000. The Association is a satellite of the Construction Industries Federation who stated on 17 August that construction in developed countries accounts for 12-15% of GDP with the implication that Ireland could emulate this. Construction in Ireland has never accounted for more than 10.3% of Gross National Income in the past decade. There are thousands of vacant new houses in Ireland today so it is hard to see on what basis this growth in economic significance is to be achieved.  State subsidies?  State contracts?  Meeting essential needs?  Offering value for money? 

Pride goes before a fall but is it not high time to see a measure of reality, candour and honesty being displayed by all of the nation’s decrepit financial institutions, not only EBS? 

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.