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

How will the Central Bank Commission earn respect among those it must impress?

The stakes for Ireland have never been higher.  Generations of Irish people are extremely vulnerable after the catastrophic and systemic collapse in September 2008 of the financial system, the Central Bank and the Department of Finance - in its role of global overseer and talent scout.

Citizens would expect that the membership of the newly inaugurated Central Bank Commission would comprise outstanding and distinguished individuals whose authentic stature and relevant experience would be an asset to the Governor and Financial Regulator. They would also be expected to act as a countervailing influence to them on the basis of knowledge, insight and most importantly, credibility. This is, after all, Ireland in reform mode and the Department of Finance demonstrating how it can pull an A-team together.

The last board of the Central Bank included a menagerie of well-meaning grandees, retirees and all sorts of extremely important, loquacious people. But they were no match for the quartet of delusionary muppets that disported themselves as the Board of Irish Nationwide Building Society.

They facilitated Michael Fingleton to obtain remuneration of €16 million from 1 January 2003 until he left Irish Nationwide (with ‘holiday pay’ of €450,000, to compensate his untaken leave), the gouging by him, in 2007, of a pension fund of €28 million leaving a residual fund of €4 million (in deficit) to cover the remaining 400 employees and, of course, his €1 million bonus that Fingleton gouged when his wretched building society was utterly insolvent.

Why did the Department of Finance choose Des Geraghty and Michael Soden to be members of the first Commission?

 

DES GERAGHTY

Des Geraghty (67) retired as President of SIPTU in 2003 and was subsequently a member of the board of the FÁS, the Cradle of Corporate Governance.

That board was stood down in disgrace this year when an investigation by the Comptroller & Auditor General revealed outrageous breaches of corporate governance resulting in large losses to the State. There have also been allegations of fraud on the part of third-parties employed to conduct training on behalf of the agency. Trainees have been unable to obtain certification for courses they believed they satisfactorily completed and an EU audit has delayed payment of funds from that source. There are therefore most serious questions about corporate governance and trust at that agency. The Public Accounts Committee have yet to issue findings on their investigation of FÁS.

It is not at all clear if Geraghty has any related education, qualifications, experience, insights or understanding of the financial industry that would commend him to serve on the board of the Central Bank Commission. His passion is poetry and he has published a couple of books.

What particular reform qualities will Geraghty be bringing in his kit bag from Baggot Street? How about credibility with the EU Commission, business process expertise and know-how, a skill in analysing budgets and overseeing subsequent expenditure? Perhaps he qualifies as the centurion guard of corporate reputation and the ‘men-in-red-braces’ who determine credit ratings, interest rates on sovereign debt, credit availability, bond spreads will be suitably impressed, despite their coldness from time to time. Those who expected to receive certificates of accomplishment for training from FÁS could be skittish about his capacity to represent the interest of the consumer in his new role.

Mr Geraghty, of course, would also have an unambiguous measure of the Department of Finance following the negotiation of the Rody Molloy ‘kiss-and-goodbye’ package (+car) and he will have observed how Pat Neary has been saved from distressing penury while the population at large are about to be pistol-whipped in the next Budget to fund his exit from College Green.

 

MICHAEL SODEN

Michael Soden seems to like the sound of his own voice and the megaphone he uses to bellow at café society.

An exponent of the ‘Why Not? Academy of Lateral Thinkers’ he suggested three days after his appointment to the Commission that if everyone in Ireland worked a 5½-day week there would be a 10% linear improvement in national productivity.

His most recent rambling was ‘Let’s quit the EU and join the US’ thus demonstrating his capacity to prostitute our national sovereignty.

The Department of Finance have now given him a pulpit and a mandate from which to bellow through his megaphone and entertain the high-polloi of the EU, the European Central Bank, the IMF, the rating agencies and the men-in-red-braces. Perhaps if a capacity to entertain was the criteria of the Department of Finance based their choice of candidate on, it is strange that they overlooked personalities such as Twink, Sinead O’Connor, Bob Geldof and Fr Brian D’Arcy as potential members of the Central Bank Commission. Given infinite reach of Soden’s wisdom perhaps Jay Leno could have enriched the Soden’s rose-tined and starry-eyed US perspective.  What can Soden offer that they could not?  They are all entertainers!

 

National Australia Bank

Soden was one the top-13 executives at National Australia Bank (The National) from 1994 to 2000. He reported to Donald Argus, Chief Executive and Managing Director from 1989 to 1999 and to Frank Cicutto who succeeded Argus in 1999.  Argus was a director of National Irish Bank (NIB) and National Irish Bank Financial Services from the time it became a wholly owned subsidiary of The National in 1987.

The High Court appointed Inspectors to investigate NIB in March 1998.   This took six years to complete and covered a series of major transgressions of company law from 1988 until 1998.  NIB was severely criticised in the Final Report of the Inspectors on the basis of findings of the utmost gravity, involving well in excess of a dozen persons, that were the consequence of a catastrophic lapse in the standards that customers and third parties dealing with any bank are entitled to expect.

The catalyst for the appointment of Inspectors was not the policing and enforcement competence of the Central Bank during the tenure of two Governors, the late Mr Doyle and Mr O’Connell. The incompetence of the Central Bank to police the Irish banks was exposed by the curiosity of two investigative reporters from RTE.

RTE reported in March 1998 that interest charges had been increased, without legitimate reason, and without customer knowledge in four branches. They also reported that customer fees had been uplifted in one branch in November 1989 without customer knowledge, or underlying justification. They stated that these practices were systematic within NIB and were motivated by a desire for enhanced profitability and career progression. It was these characteristics and values that attracted the vicarious patronage of Argus. It was these RTE reports which prompted High Court intervention less than a week later.

The matters investigated involved large sums of money and demonstrated a lack of commercial probity that cost NIB €64 million. The inspectors’ findings included:

• The opening and maintenance of bogus non-resident accounts in NIB branches enabling customers to evade tax through concealment of funds from the Revenue Commissioners
  
• Fictitiously named accounts opened and maintained that enabled customers to evade tax
  
• CMI policies were produced as a secure investment for funds undisclosed to the Revenue Commissioners
  
• Special Savings Accounts had DIRT deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed – a curtain raiser to the establishment of the DIRT Inquiry by the Public Accounts Committee in 1999.
  
• There was improper charging of fees to customers
  
• There was improper charging of interest to customers

At no time prior to the appointment of the Inspectors did NIB address the issue of a potential retrospective liability to the Revenue Commissioners for tax arising from the irregularities in the operation of DIRT.

NIB, under the direction of its executive leadership in Australia, had therefore debased several major institutions of this State, including the Central Bank and the Revenue Commissioners and ruined the reputation of Ireland as a trusted, respected component of the global financial sector. What was discovered made Nigeria scam merchants’ seem virtuous, noble, respectable and trustworthy.

The response of The National to the appointment of Inspectors by the High Court was: “During the year (1998) NIB was the subject of investigations arising from allegations against certain parts of its operations. While involving unfavourable publicity, none of these investigations demonstrated widespread, or systematic, misconduct and the Bank will continue to work constructively with the authorities in order to resolve these matters” (The National 1998 Annual Report). These are the views of the executive leadership The National that included Soden at that time.

Major breaches of the Companies Acts seemed to have had as much impact on Mr Argus and his leadership team as an intermittent episode of trapped wind, corporate heartburn and halitosis. There was no evidence of Matthew Elderfield’s vision of intrusive supervision between 1988 and 1998 in the relationship between The National and its own wholly-owned subsidiary in Ireland.

When the Inspectors’ Report was published in 2004, after Soden left Bank of Ireland, The National issued its second press release on the subject of the NIB investigation. It stated that “the Director of Corporate Enforcement in Ireland today (30 July) released the Report of the High Court Inspectors into certain past business activities of NIB. The events go back a long time” - an antiseptic response to what transpired to be a plague of rapidly deteriorating bad behaviour as Irish banks engaged in ‘follow-the-leader’.

The Director of Corporate Enforcement was subsequently to begin a process to seek the disqualification of nine senior managers of NIB. Disqualification prevents the person concerned from acting as an auditor, director, or other officer, receiver, liquidator or examiner – or be in any other way, whether directly, or indirectly, concerned, or take part, in the promotion, formation or management of any company or society registered under the Industrial and Provident Societies Act 1893 to 1978.

Mr Justice Peter Kelly stated on 26 October 2005 with respect to NIB “the edifice of banking is built on a foundation of trust. On the Inspectors findings there was a breach of trust by dishonesty. The operations were carried out over a period of years in a deliberate fashion on the part of the Bank”.

 

Bank of Ireland

Soden was employed by Bank of Ireland from 1 September 2001 until 29 May 2004, a period of 1,001 days, for which he received remuneration of €4.79 million. He joined the Court on 11 September 2001 and became Group Chief Executive on 1 March 2002. Soden held this position until he abruptly left the employment of Bank of Ireland on 29 May 2004.

Soden’s career at bank of Ireland was generously described by Laurence Crowley, the Governor, on 29 May 2004, as “having made an enormous contribution” and having placed the Bank of Ireland “in a position of solid strength for future growth”.

During the 820 days that he was Group Chief Executive, 61% of total Bank of Ireland loans were in respect of residential mortgages, property, construction and commercial mortgages. How comfortably does this fit with Matthew Elderfield’s views on lending standards? Soden is also an example of the over-remunerated asset acquirer – who vigorously pursued Abbey National, the former UK building society, in 2002, until he was shunned.

Lending growth by Bank of Ireland to the Irish residential mortgage sector, under Soden, was achieved through increasing lending, from 12% to 20% of total loans to new Irish borrowers, in respect of properties with a loan-to-value ratio of between 91-95%.   Lending to new Irish borrowers in respect of properties with a loan-to-value ratio of 75%, or less, concurrently reduced from 53% to 45% of total loans to that category. Mortgages were also extended to British customers towards properties with a loan-to-value ratio in excess of 95%.  How does this practice connect to Matthew Elderfield’s views on risk management arrangements?

It clearly had catastrophic risk implications because the Irish taxpayer was forced to provide €3.5 billion to supplement its capital and NAMA will be taking over €12 billion in loans at a discount of 42%.

When describing the impact of his leadership at Bank of Ireland  Soden stated that “this very consistent performance is the result of focused management attention to the needs of our customers and clear strategies for growth.  The achievement of our strategic goals is also supported by an excellent credit culture, a commitment to the highest standard of corporate governance and behaviour”. (Group Chief Executives Operating and Financial Review - Annual Report 2003).

But it was his own hypocrisy that hastened Soden’s departure and the ‘embarrassment’ that he caused his counterparts on the Court of Bank of Ireland, - prominent individuals such as Denis O’Brien, Ray MacSharry, Maurice Keane and Richard Burrows among them. Is it realistic that Soden, as a member of the Central Bank Commission would be overseeing the effectiveness of the board member at Bank of Ireland who was a contemporary of his in 2004 when he ‘embarrassed’ his colleagues?

Embarrassment at Bank of Ireland, comes with a hefty price tag, which in this instance was €96 million, as reflected in the drop in share price from the 20 to 29 May 2004, when Mr Soden’s foibles with adult content on the internet during business hours came to light.

PERCEPTION OF CENTRAL BANK COMMISSION

Perception counts for much in the assessment of credibility the calibration of credit rating, bond spreads and sovereign interest rates. What credibility will this Commission have?  Why must it be necessary to waste time explaining its make-up?

Credibility made it possible for William Howard Taft to become the 10^th Chief Justice of the United States Supreme Court eight years after he left the White House in 1913 and it was not possible for Richard Nixon to emulate him 60 years later. That would also explain why senior members of the Christian Brothers order do not appear in the leadership ranks of rape crisis centres’ located in major metropolitan locations.

Irish people deserve better from their Government and their Department of Finance.  Thoughtful consideration of what is really in the national interest is like MasterCard – priceless.

Inflated, bloated executive salaries at Irish Nationwide Building Society, despite CIROC recommendations

The response by Brian Lenihan to a question posed by Deputy Seán Barrett TD about the level of executive remuneration at Irish Nationwide Building Society was curious.  The question was put on May 12 – asking Lenihan ‘what steps he will take to ensure the Irish Nationwide Building Society complies with the recommendations made by the covered institutions remuneration oversight committee; and if he will make a statement on the matter’.  The response was “I am advised by Irish Nationwide Building Society that the remuneration of Directors and senior staff at the Society is in compliance with the recommendations of the Covered Institutions Remuneration Oversight Committee.”

This wretched building society has already reported a loss of €2.48 billion in 2009.  It devoured €2.7 billion of public money.  Ninety six percent of its €2.7 billion impaired loans relates to speculative commercial property transaction, much of it not even in this country,

The six years of delinquent financial regulation was characterised by what appears to have been a very passive relationship to this Society.  It is astonishing that the Brian Lenihan’s advisers chose to rely on information from Irish Nationwide about the issue of executive remuneration because a casual perusal of the 2009 Annual Report would suggest otherwise.

Rather light-touch, I would have thought, on the part of the Minister's advisers. The debacle that Ireland is now in is attributable to excessive reliance on the representations of this entity and its counterparts rather than vigilance, understanding and verification; an attitude more Greek than German.  The two directors representing the public interest, for example, were paid €38,000 more that CIROC recommended they be paid. 

The Covered Institutions Remuneration Oversight Committee (CIROC) report was published by Minister Lenihan on 27 February 2009 and given the crisis that prevailed then and the sense of urgency and caveats which the report  reflects, one presumes that its recommendations were to be promptly effective from 2009 financial year.

The CIROC report recognised that reduced salaries for some executives may require the revision of existing contractual arrangements; that there must be sufficient headroom between the recommended remuneration of a chief executive and the salaries of those reporting to the chief executive, such as the chief financial officer. Any departure had to be justified on case-by-case basis. It also noted that top-level individuals in financial institutions did not generally contribute to their pension funds and recommended that a review should reflect an appropriate balance between the personal contribution of all employees and that of the employer.

The CIROC report recommended the following levels of base annual remuneration in the case of Irish Nationwide Building Society:

• Chairman €144,000 (40% of chief executive's base salary)

• Chief Executive €360,000

• Ordinary board member €29,000 (20% of chairman’s fee)

• Board member chairing major committee €36,000 (25% chairman’s fee)

The Annual Report reveals:

• The role of chairman of Irish Nationwide was remunerated in 2009 within CIROC guidelines.

• The role of chief executive was paid €494,000, that is €134,000 in excess of what CIROC recommended. Mr Fingleton, as chief executive from 1 Jan – 30 April, was paid €221,000 for that period - €101,000 more than CIROC recommended.  The current chief executive, Mr McGinn, received, on a pro rata basis, €22,000 more than CIROC recommended. Mr McGinn apparently has the use of a residence leased by the Society towards which he paid a personal contribution of €6,050 from 15 Jul to 31 Dec. It is not clear if there is an undisclosed subsidy amounting to the difference between this sum and the actual rental for this period.

• Each of the current non-executive directors is a chairman of a major sub-committee of the board of the Society but the remuneration of each of them exceeds CIROC recommendation by a cumulative sum of over €68,000 - details attached.

• The role of chief financial officer which ought to attract a remuneration ‘with sufficient headroom below the remuneration of the chief executive, €360,000’ was paid a total of €539,000. This includes the remuneration of the former executive director and Secretary, Mr Purcell, who was paid €385,000 in 2009. I would question in this instance, that apart from breaching CIROC recommendations, there is information in the public domain that the records of this Society are in such a state that the current chief executive severely criticised the impact of the lending policies and practices of the previous management and that the determination of the final losses of the asset portfolio remain highly uncertain. Does this not raise fundamental questions relating to the corporate governance of this entity as the Government rushed headlong into committing €2.7 billion to it, only to realise that billions more in State funding are needed if it is to be kept on life-support.  Under what circumstances could Minister Lenihan have entertained a derogation from CIROC recommendations in the case of Mr Purcell, if one was sought, against the background of the information now in the public domain?

Readers may not be realise that in addition to the €28 million personal pension fund paid for by Irish Nationwide and received by Mr Fingleton in 2007 that he also remunerated himself in the sum of €10 million from the period our property bubble began inflating, 1 January 2003 until he departed on 30 April 2009.  This puts the €1 million pre-contractual bonus that he paid himself in 2008 in a wider context. 

Incidentally, the pension fund for the 399 staff of the Society, whose average annual pay is approximately €41,000, is €4.4 million - one seventh of the sum Mr Fingleton personally obtained.  The employees pension fund  bore a deficit of €700,000 on 31 Dec 2009.

Is the reformation of our financial system not in some ways comparable to the reform process that Mayor Giuliani deployed in cleaning up New York – where discipline started with the seemingly inconsequential issues, like removing graffiti from the subway system?  But in this instance, is compliance with top-level remuneration CIROC not a most obvious example of a similar discipline?

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. 

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.

Fingleton's Hubris and Brass Neck

Michael Fingleton has dominated Irish Nationwide Building Society for more decades than I can remember. It operates a 50-branch network including a branch in Belfast and London.

Fingleton's €2.313 million annual remuneration in 2007 was more than 47 times greater than the average annual remuneration of each of his 400 staff. This increased to €2.38 million last year but there is no evidence that a remuneration committee is in place at the Society to sanction this.

Directors' emoluments between 2000 and 2007 amounted to €16.75 million but each annual report strongly and consistently advocates 'the importance of cost control and how it continues to be a major objective of the Society'. This was a period when its emphasis changed to commercial property and it was thought there were ambitions to demutualise.

There have been only 3 non-executive directors on his board (compared to 7 at EBS), each with long tenure - until the recent appointment of 2 non-executive directors, Rory O'Ferrell and Adrian Kearns, by the Irish Government, who are to act in the public interest. The non-executive directors received 8.4% of the directors' emoluments in 2007. Is this a measure of their proportionate influence? It would seem that their influence is as muted as that of the the impact of the Governor of the Central Bank in reigning in the Irish banks as the credit crisis worsened and they were knee-deep in property development.

The expression 'corporate governance' does not feature, even once, in the Society's 2007 annual report. There is not as much as a whispered comment on the website of the Corporate Governance Association of Ireland about the corporate governance standards at Irish Nationwide (or, indeed, Irish Life & Permanent Plc).

Some 60% of the assets and 70% of the revenue of Irish Nationwide is derived from the commercial sector in Britain and Ireland. It is hard to see how it can escape the carnage now visiting all financial institutions, particularly those embedded to the commercial sector, especially given the experience at EBS.

Mark Moran, chairman and Alan Merriman, financial director of the EBS resigned following the publication on 10th March of EBS annual results for 2008. This followed an impairment charge of €110 million on 20% of its loan book (€95 million arising from the provision of development finance and €15 million against funding provided to an Icelandic bank, now nationalised). This resulted in a loss before taxation of €38.2 million. No bonuses are payable to EBS management in respect of 2008; not so at Irish Nationwide! EBS, in assessing its loan portfolio, is concerned with €500 million in development financing. Irish Nationwide had over €9.75 billion in commercial mortgages in 2007.

Revelations about Fingleton's €1 million 'pre-contracted incentive bonus' is the lastest of many displays of hubris and brass neck and it is also another rusty nail in the reputation of Ireland's financial services industry.

Remuneration levels in this industry have risen so astronomically since the turn of this century that they bear no coherent relationship to the income and resources of most borrowers, savers, and personal investors, especially in the midst of such a severe economic downturn.

The decision of the Irish Government to nationalise Anglo Irish Bank in January and to provide very substantial resources to 6 others from the Republic’s National Pension Reserve Fund has intensified public scrutiny and outrage. The Irish Government’s Covered Institutions Remuneration Oversight Committee (CIROC) completed it report on February 27th and Mr. Brian Lenihan TD, Minister for Finance, published the report on March 13th. Pay ceiling ranging from €230,000, in the case of the chief executive of Postbank, to €690,000, in the case of the chief executives of Allied Irish Bank and Bank of Ireland were recommended in the report. The pay ceiling recommended in respect of the Republic’s two building societies is €360,000. But Lenihan has put an absolute cap of €500,000 on maximum bank chiefs’ pay.

Cheslea Building Society, in the south east of England, is comparable in scale, scope and longevity to Irish Nationwide - although its total assets are €2 billion greater. Established in 1874, it operates a network of 35 branches and had assets in 2007 of €17.95 billion, compared to assets of €16.04 billion at Irish Nationwide in 2007. It is the 5th largest building society in Great Britain. The pay of its chief executive, Richard Hornbrook, in 2007, was £424,000 (€576,640), a quarter of that paid to Fingleton, and just 12 times that of the average paid to each of his 1,018 staff.

The former chief executive of Bank of Ireland, Brian Goggin, was criticised harshly in many quarters for the remuneration of €2.972 million that he received in 2007. But Bank of Ireland's total assets in 2007 were €188,813,000,000,11 times greater than those of Irish Nationwide. Would this justify a salary of €33 million for the top job at Bank of Ireland?

It was revealed in a High Court case in November 2007 that Irish Nationwide made loans of over €10 million each to Michael Lynn and Thomas Byrne, two former Irish solicitors who were dismissed from the profession after they gave multiple undertakings to financial institutions in respect of individual properties.

Last September, the ratings agency, Moody's, downgraded INBS because of its exposure to commercial property and development, which accounts for 80% of its loans. Moody's took into account a rapid deterioration in land and property values, which it says was exacerbating the already high loan to value ratios on the commercial property and development loan book of the building society. It was also concerned about what is described as 'concentration risks to its largest 20 borrowers' of the Society.

The former chairman of Anglo Irish Bank, Seán FitzPatrick, by mid September, proposed a merger of Anglo Irish Bank and Irish Nationwide but this was rejected by the Minister for Finance who stated the INBS was ‘well funded’ when the Irish Government inaugurated the State guarantee scheme for bank deposits.

When the Irish Government guarantee scheme was inaugurated on September 29th, Michael Fingleton’s son, who is employed at the London branch of Irish Nationwide, sent an e mail to at least one leading global bank stating that as a result of the protection of the Government's new bank guarantee plan, Irish Nationwide “represented the safest place to deposit money in Europe . . ." This directly contravened the assurance of Brian Lenihan, Minister for Finance that there would be no anti-competitive practices as a consequence of the guarantee and he referred the e mail of Fingleton junior to the Irish Financial Regulator who fined the Society €50,000.

Ireland awakened on December 18th to the shock announcement that Seán FitzPatrick had resigned as Chairman of Anglo Irish Bank and as a director of several other companies. It was disclosed that personal borrowings by him of at least €228 million, over an 8-year period by him from Irish Nationwide Building Society had been used to conceal his personal borrowings from the auditors and shareholders of Anglo Irish Bank. His borrowings from the Society were repaid in lump sum payments shortly after the Anglo Irish fiscal year end. While the staff of the Irish Financial Regulator discovered these transactions as early as last January the former chief executive of the Regulator declared that he was not advised of them and he resigned this position last January.

The Chairman of Irish Nationwide, Dr Michael Walsh tendered his resignation on February 19th. He had been a board member since 1995 and chairman since 2002. He cited ‘unfolding events’ as a context for his resignation. He indicated that the Society cannot survive without significant Government support and further reorganisation. The Financial Regulator has concurred with this.

Lenihan has indicated that he intends to oblige Fingleton to repay his 2008 bonusand his view better prevail. How can a bonus be paid in repect of unknown results? The citizens are now vital stakeholers and must be afforded an opportunity to consider the 2008 results, the governance standards are appropriate at Irish Nationwide before the issue of bailout is decided.

The political system has sleepwalked around Michael Fingleton for far too long. Failure to prevail would be tantamount to the Irish Nationwide grossly disrespecting the sentiment of the Irish public on whose support and goodwill its future viability depends and who in turn face most threatening and uncertain circumstances. They must not to be treated as nincompoops and nitwits.

What Would Warren Buffett Make of Anglo Irish Bank?

Warren E. Buffett is a greatly admired icon of the American business world. He was born in August 1930 in Omaha, Nebraska. He is ranked 2nd on The 2009 Billionaire List published by Forbes with a net worth of $37 billion, having been the richest billionaire in 2008, when his wealth amounted to $62 billion. He founded Berkshire Hathaway Inc in 1964. He has not increased his annual salary at Berkshire Hathaway beyond $100,000 (€78,000) in 28 years. Apart from salary, his overall compensation amounts to $491,000 (€384,000) but he will not be paid a bonus this year. He has also lived in his present home for over 50 years. He is still the Chairman of the Board and around 31,000 shareholders are expected to attend the company’s annual general meeting on Saturday, 2nd May in Omaha, an event that extends over a weekend and offers those attending the opportunity of an extensive discounted shopping spree at a wide range of Berkshire Hathaway consumer businesses!

Berkshire Hathaway investment interests are far reaching. They include the utility sector, insurance, manufacturing and retailing, finance and financial products and a wide range of investments in companies such as Coca Cola, American Express Company, Johnson and Johnson, Proctor & Gamble, sanofi-aventis, Swiss Re, Wal-Mart, The Washington Post and Tesco.

Buffet’s has very focused priorities:

• He ensures that they maintain substantial liquid resources, commits to modest short-term obligations and has diverse sources of earnings and cash



• He strives to ensure that each business has a robust basis (‘moats’) of competitive advantage



• He develops operating managers who deliver exceptional results
  

Despite his accomplishments, not everything he was invested in has been rewarding. The past year has seen his wealth drop by 40% as a consequence of the fall in value of the companies he has invested in. Most of the Berkshire businesses were adversely affected by the economic developments last year but between 1965 and 2008 they achieved a compound annual increase of 20.3%, or an overall gain of 362,319% since 1964.

He invested $244 million on shares in two Irish banks in 2008 as they appeared cheap to him. But by the end of 2008 he had incurred an 89% loss on these, a development he describes as an ‘unforced error’ on his part.

Anglo Irish Bank was nationalised by the Irish Government on 21 January last on account of its systemic importance to the Irish financial system. Its former chairman and founder, Mr. Sean FitzPatrick, resigned on 18 December 2008 when it was disclosed that loans amounting to €87 million were not reflected in the accounts of Anglo Irish Bank and were hidden from stakeholder scrutiny at Irish Nationwide Building Society. While FitzPatrick maintains that this was a legal, if not transparent series of transactions, they would be unlike to pass muster with Buffett. Furthermore, the €1 million bonus and the 12% salary increase for 2008 paid to Michael Fingleton, the chief executive of Irish Nationwide Building Society is likely to be as much of an affront to Buffett as it is to Irish citizens.

The latest balance sheet of Anglo Irish Banks (at 30 Sep 2008), reflects €2,233,000,000 (€2.23 billion) invested in derivative financial instruments. Derivatives are financial contracts whose value is determined by an underlying value such as that of an asset, a commodity, a mortgage or even the movement of an index, such as an interest rate or the FX rate attaching to a particular currency. They are supposed to mitigate the risk of a change in the value of the underlying assets and that activity is hedging. The notional value of a derivative, based on the nominal value of the various assets underlying it, is not recorded on the balance sheet of the business owning it - but the market value is.

Buffett is scathing about structured derivative and describes them as ‘dangerous’ because they have dramatically increased the leverage and, therefore, the risks inherent in the financial system. It is almost impossible for investors to understand and analyze large businesses with substantial amounts of derivatives. He is likely to have similarly sceptical about securitized assets and leveraged funds.

An ordinary share can be bought or sold within days with one party obtaining cash and the other the corresponding security. There is no enduring counterparty risk which means that problems cannot fester. Rapid settlement is the vital to the integrity of the stock market.

But structured derivative contracts often go unsettled for years, or even decades and counterparties can build huge claims against each other. Paper assets and liabilities are hard to completely accurately assess; yet, in the case of Anglo Irish Banks, they are an important element of it financial profile.

A complex web of mutual dependence has developed amongst financial institutions with receivables and payables becoming concentrated among a small number of dealers who maybe excessively leveraged in other ways too. Buffett says that such participants “seeking to dodge trouble face the same problem as someone seeking to avoid venereal disease. It is not whom you sleep with, but also who they sleep with” that is the issue. The current financial crisis has demonstrated that only companies that can ‘infect’ a neighbourhood are attracting US government support and intervention.

Buffet believes that the chief executives of many large businesses were incapable of managing them because of the complexity of the derivatives those businesses are involved with. He doesn’t believe that any mechanism can provide sufficient transparency to describe or regulate derivatives or for auditors to audit them. He cites the collapse of Fannie Mae, Freddie Mac and Bear Sterns to support his opinion.

Buffett might also be curious to know if there is a connection between the Anglo Golden 10 that were provided with loans by Anglo Irish Bank to buy its shares outside normal market structures last year and those borrowers who owe the Bank more than €500 million. He might ask if this is the case were any covenants and obligations attaching to these loans broken at any time. If so what impact could this have had in persuading them to become involved in this Anglo loans for shares episode?