Taoiseach resists outrageous bank lobbying on salary cap

Viewed from as far as Buenos Aires this evening, I am sure that many taxpayers are greatly relieved that the Taoiseach confirmed to Dáil Éireann on 27^th September that he ‘sees no good reason’ for breaching the €500,000 salary cap on bank chief executives’ remuneration in response to prolonged lobbying by AIB and others over many months.

All stakeholders in our society have had to make the most profound sacrifices due to the venality of bankers’ and their boards’ of directors in the interests of economic survival, recovery and vitality. A Government decision to cave into the banking lobby on this issue would therefore have had the most profound adverse consequences which would have found unequivocal expression in the forthcoming presidential election and beyond it.

High salaries did not enhance the standard of corporate governance, providence and prudence in the Irish banks’ prior to their collapse and it would be the utmost folly to consider that the resumption of salary deals to any elite that are utterly extravagant in the context of our national circumstances would deliver reform. The banks and their elite fellow travellers must restore trust with society before they attempt to indulge fanciful remuneration whims.

It would also be interesting for taxpayer’s to be informed, in clear an unambiguous terms, how much the State is paying consultants ‘and professional advisors’ to rehabilitate AIB, now State owned.

Gravy train for top echelons in Irish State companies

UCD economist Colm McCarthy published a review of the Irish commercial State companies this week as a prelude to the Government considering their possible sale.  The media have been commenting on the high level level of pay at the top of these organisations.  The average employee remuneration in all of them is €54,600 but I thought it would be interesting to set out the the average pay in each of them and the multiple of that average which the chief executive receives.  The data relates to 2009.

Entity	CEO Remuneration in 2009 €	Average Employee Remuneration in 2009 €	Multiple of employee average received by CEO
CIE	251,160	49,100	5.1
ESB	752,568	75,500	9.9
Bord Gais	394,000	67,300	5.8
EirGrid	407,000	83,400	4.8
Bord na Móna	392,000	44,800	8.7
Coilte	417,000	54,267	7.6
Dublin Airport Authority	568,100	49,300	11.5
Irish Aviation Authority	324,000	95,600	3.3
Dublin Port	317,000	67,900	4.6
RTÉ	326,000	59,700	5.4
An Post	500,000	43,300	11.5

The Minister for Finance, Brian Lenihan,  announced in his Budget speech last December that ‘there should be a maximum salary rate of €250,000 in the public sector and that the position of the Minister for Finance as a shareholder or the statutory shareholder can be used to enforce the objective of the maximum salary within a reasonable timeframe’.

Lenihan’s ‘capacity to enforce’ was not apparent when the former managing director when he demanded the resignation of the former managing director of AIB just weeks earlier and he departed having pocketed benefits worth €3 million after one year in that role

Pay Day at AIB

When the Covered Institutions Remuneration Oversight Committee reported to the Finance Minister in February 2009 they stated that ‘pension arrangements for senior executives in banks should be at least broadly similar to those applicable to the generality of the staff of the institution’ This Report also recognised that the top management of banks make little or no contribution for their pensions and recommended an appropriate balance between personal employee contributions and the employer contributions and the extent to which they employee contribution may need to be increased needed to be immediately reviewed

Why did the Department of Finance tolerate an agreement nine months later, in November 2009, to facilitate the payment to Colm Doherty, the former managing director of AIB, a cash payment of €2 million in lieu of a contribution to his pension? Given the trading results for 2010 and the overall circumstances of AIB, how is it possible, for this nationalised bank, to fully discharge such extravagant payments to a departing managing director - while thousands of AIB employees are facing the loss of their jobs and great uncertainty about their termination packages?

During his 1-year tenure from mid November 2009 AIB lost €10.2 billion and total assets decreased from €174 billion on 31 December 2009 to €145 billion at the end of last year. It was obliged to take a 54% haircut on the €18 billion of property loans taken over by the State. It lost its listing on the Irish and London Stock Exchanges and a taxpayer investment of €7 billion means that with 92% of the equity owned by the State it is effectively nationalised. Its shares now trade on the Enterprise Securities Market alongside the mom and pop operation.

Loans outstanding are €94 billion, of which €56.8 billion are either in residential mortgages or property and construction and almost 30% of them are wither vulnerable, impaired or under scrutiny. Customer accounts have dropped from €84 billion to €63 billion in a year and the Irish banks are generally unable to tap funding markets.

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

Irish bank bail out costs escalate

 

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

 

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

 

The cost of future assistance is estimated at €12.26 billion

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

 

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

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

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

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

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

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

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

Will credit really start to flow to Irish SME’s?

Finance Minister Brian Lenihan has published and SME Lending Plan from AIB and Bank of Ireland in which each of them indicate an intention of making €3 billion available to SME’s in 2010/11

Which customers are likely to be in a position to use such additional resources and what impact will the provision of these facilities have on lenders? Borrowers that qualify are supposed to be exporting firms. .

An SME employs fewer than 250 persons; have a turnover of less than €50 million and a balance sheet less than €43 million.

Total lending to SME’s at 31 December 2009 amounted to €32.28 billion

	€ Million
Loans	26,340
Overdrafts	2,833
Finance and Leasing	2,407
Invoice Discounting	700
	€32,280

This proposal indicates a potential 19% increase in credit availability

There were 33,192 applications for credit amounting to €1.854 billion in the fourth quarter of 2009; 131,500 for all of 2009. Credit applications for the fourth quarter of 2008 amounted to €2.892 billion. The approval rate is estimated to be 84%. The utilisation rate for overdrafts is 52%.

Profile of Credit Applications

Sector	Number of Applications Q4 2009	Amount Sought € Million	Total Borrowing
Agriculture and Forestry	9,512	379	4,150
Fishing	128	10	325
Mining and quarrying	89	9	303
Manufacturing	1,742	198	2,630
Electricity, Gas and Water	63	16	279
Construction supply	1,808	61	1,249
Wholesale and repair	4,507	346	6,954
Hotels and restaurants	1,776	125	7,327
Transport, storage and communications	1,442	69	1,512
Financial intermediation	251	15	348
Real estate and business activities	7,783	390	3,816
Health and social work	1,071	99	1,472
Other community and personal services	3,030	137	1,915
TOTAL	33,192	1,854	32,280

Each of these sectors has issues from a banking perspective which I will comment on in the context of the change in their overall borrowing profile between December 2005 and December 2009

Credit Trends 2005 – 2010

Resident non-government credit, excluding personal borrowing, residential mortgages and lending to the educational sector increased by 121% in this five-year period.

The following table summarises the change in each sector and the relationship between the deposits maintained in each sector and how these relate to borrowing by these sectors as a whole:

Sector	Change in borrowing Dec 2005 – 09 € Million	Resident Deposits Dec 2009	Resident Credit Dec 2009
Agriculture and Forestry	1,554	2,496	4,933
Fishing	-70	112	336
Mining and quarrying	177	294	415
Manufacturing	1,628	5,989	7,137
Electricity, Gas and Water	513	898	1,120
Construction	5,495	3,578	15,042
Wholesale and repair	4,867	4,591	12,591
Hotels and restaurants	3.903	655	10,905
Transport, storage and communications	781	3,766	3,005
Financial intermediation	46,540	45,106	82,676
Real estate and business activities	61,598	14,781	93,845
Health and social work	1,845	894	2,679
Other community and personal services	1,034	4,800	2,832
TOTAL	€129,865	€87,960	€237,516

These sectors, in their entirety had credit outstanding of over €237 billion at the end of December 2009, a year in which our GDP reduced by 7% to €176 billion. The SME component of this, €32.2 billion was 13.5% of the overall total.

The level of credit they were responsible for increased by 121% in the previous five years. The deposits of these sectors maintained. €87.9 billion means that the overall ratio of deposits to loans was 2.7.

It is very hard to see much action in the construction sector given the collapse in demand or in the hotel and restaurant sector given the huge overcapacity as a consequence of tax breaks valued at €1 billion. Real estate is dormant and there will not be much international growth in agriculture.

Supply Perspective

The Financial Regulator has insisted that Tier 1 capital at AIB, which in common with its counterparts, is to be 8% means that additional capital of €7.4 billion is necessary by 31 December 2010. It is not yet clear where this is to come from.

AIB is the dominant force in the Irish deposit market laying claim to customer current and deposit accounts worth €52 billion of its total customer account base of €83.9 billion.

Bank of Ireland has a similar customer account total, €85 billion – but only €35 billion of this is derived in Ireland. The remainder is sourced in the UK and capital markets. Additional credit means additional capital.

AIB’s credit commitment to these sectors at 31 December 2009 and its NAMA relationship is as follows:

 

Sector	Change in borrowing Dec 2005 – 09 AIB Resident Loans € Million	Resident Deposits NAMA AIB Bound Loans Dec 2009 €Million
Agriculture and Forestry	2,015	24
Fishing
Mining and quarrying
Manufacturing	3,108	37
Electricity, Gas and Water	844	64
Construction and Property	15,930	18,055
Wholesale and repair
Hotels and restaurants
Transport, storage and communications	2,382	621
Financial intermediation
Real estate and business activities
Health and social work
Other community and personal services
TOTAL LOAN BOOK (IE)	€69,911
TOTAL LOAN BOOK (GROUP)	€103,341

Bank of Ireland had an Irish loan book of €63,450 million, slightly less than that of AIB. The make-up of it was:

 

Residential mortgages	28,350
Property and Construction	9,450
NAMA	8,100
Corporate and SME	14,850
Consumer	2,700
TOTAL LOAN BOOK (IE)	€63,450
TOTAL LOAN BOOK (GROUP)	€119,439

Fingleton’s fantasy at Irish Nationwide is all dust

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

Massive Expansion in Lending

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

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

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

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

Chicken’s come home to roost

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

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

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

2009 Results

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

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

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

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

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

 

Demutualisation

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

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

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

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

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

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

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

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

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

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

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

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

Personal Remuneration

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

Fingleton’s Personal Remuneration
at Irish Nationwide Building Society

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

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

Directors’ Report 2004

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

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

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

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

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

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

Directors’ Report 2005

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

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

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

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

Directors’ Report 2006

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

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

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

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

Directors’ Report 2007

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

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

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

Directors Report 2008

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

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

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

Directors’ Report 2009

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

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

Mortgage Lending and Mortgage Funding

 

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

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.

Red-neck AIB Mujahadeen jihad designed to humiliate the Government

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

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

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

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

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

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

 

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

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

 

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

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

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

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

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

Cadbury Report on Corporate Governance

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

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

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

 

Role of Chairman

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

 

Separation of Powers

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

 

Recent Irish Financial Sector History

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

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

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

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

Candidates for top positions in Irish banks must be independently vetted

ALL candidates for top positions in systemically important Irish banks and building societies’ must be independently vetted before being offered the job.  Responsibility for this ought to rest with the Governor of the Central Bank or the Director of Corporate Enforcement.

The competence of incumbents also needs to be routinely scrutinised against known criteria and severe sanctions put in place if breaches of competence are identified.

The resignation of the chief executive, Eugene Sheehy  and chairman, Dermot Gleeson of AIB was announced on 1 May to avert a revolt at the AGM.  The position of chief executive has still not been filled although AIB seem to be attempting to manoeuvre an insider into it.  That is an appalling vista for a company that has sucked €3.5 billion for taxpayers to compensate for its grotesque incompetence and inadequacy.  The current financial crisis is merely the latest in a series of monumental blunders at this bank including the loss of $691 million in its US affiliate, Allfirst, by the rogue trader, John Rusnak; systemically overcharging its own customers and tax evasion of epidemic proportions through the allowing Irish customers maintain offshore bank accounts.  AIB and Bank of Ireland seem to embrace the arrogant posture as an entity ‘too big to fail’ with a management untouchable by Government that was too big for its hobnail, country and western boots.

An  article by business columnist, John McManus in The Irish Times on October 19th describing AIB as being ‘arrogant’ in attempting to appoint an insider to the position of chief executive was followed by a letter to the paper from former AIB director, Padraic Fallon on October 21^st endorsing the candidacy of the imputed candidate – and signalling to the Irish public how the cosy cartels and golden circles are alive and kicking, crisis, or no crisis. This prompted me to have my say on this matter which was published in The Irish Times on October 19^th and in the Irish Examiner the following day.

I contended that given the scale of taxpayer support of the banks and building societies, it is simply not credible to appoint insiders to significant positions of influence banks and building societies’ being bailed out by the State and that the view of the Minister for Finance must prevail, if public confidence is not to evaporate.

There doesn’t appear to be any processes currently in place in Ireland where candidates for significant positions of influence are vetted thoroughly by the Central Bank or the Financial Regulator. A consequence of this is that an insider was chosen by the Court of the Bank of Ireland to be its incumbent chief executive. This person, having been previously in charge or retail operations in Ireland at Bank of Ireland and those reporting to him are directly responsible for the SNAFU that Bank of Ireland is now in which the taxpayer is bailing out.  British banks no longer have a free hand to make senior appointments.

The British Financial Services Authority (FSA) is the counterpart of the Irish Financial Regulator. Its mandate is to regulate the 5,000 firms in the British financial services industry and it has four objectives:

1. maintaining market confidence
2. promoting public understanding of the financial system
3. securing the appropriate degree of protection for consumers
4. fighting financial crime.

It has independently vetted candidates for positions that perform ‘significant influencing functions’ (SIF) since October 2008 and it announced an even tougher approach to this issue two weeks ago. These positions in practice are chairman, chief executive and senior independent director of systemically important financial institutions.

During the past year 15 of the 224 candidates who applied for top jobs, including chairman or chief executive, have pulled out before a formal decision was made. Twelve of them dropped out after an initial interview with the FSA during which they were questioned about the adequacy of their ‘skills, experience and integrity’ for the job. Companies are unlikely to challenge FSA decisions because appeals and their results are public and if an appeal is unsuccessful the FSA could make a public statement identifying the applicant and the firm involved. The FSA blocked 16 appointments from a total of 224 it has reviewed. Another 156 were accepted and 52 are pending.

The FSA wrote to all regulated firms two weeks ago, in the light of what it saw as shortcomings exposed by the financial crisis, to reinforce its regulatory philosophy and more intrusive approach in placing a great deal of emphasis on governance and the responsibility of senior management. New procedures have been introduced to interview, at its discretion, candidates applying to perform SIF roles in particular firms and it is to place greater emphasis on monitoring the performance of persons already performing SIF roles. This includes reviewing more critically the competence of such persons. The FSA assessment of competence of persons performing SIF roles is based on expectations set out in a handbook titled Supervision Manual

One of the key questions the FSA expect relevant senior management of a firm to be able to answer is: What are the circumstances under which the firm will fail?

In assessing competence, the FSA will expect senior management to be able to demonstrate their understanding of the inherent risks in the business/markets and to articulate what plans are in place to mitigate the risk of failure.

The FSA will take tough enforcement action against approved persons where it finds evidence of culpable misconduct or a breach due to competence failures (as well as cases of dishonesty and lack of integrity).

The principal purpose of the interview is to help assess the candidate’s fitness and propriety, including his or her competence and capability, to perform the role in question.

The interview (which takes place at FSA offices and normally lasts about 90 minutes), explores a range of issues that are relevant to our approval decision, including, but not limited to the:

• responsibilities of a person approved by the FSA to perform a controlled function
• knowledge, skills and experience that the person will bring to the role
• person’s view of the main risks facing the firm and the role they play in managing them; and
• FSA expectations of the individual in performing the SIF role.

The FSA would not expect the candidate to be accompanied by a representative of the firm at the interview. In certain cases, the FSA may decide to meet separately with appropriate representatives from the firm to gain additional insight into the firm’s due diligence undertaken on the candidate. Where the firm wishes to send a representative to accompany the candidate, this should be discussed and agreed between the firm and the FSA prior to the interview taking place.

In circumstances where the FSA decide to grant an application, it will provide written notice to the firm, who in turn, should notify the person concerned. In addition, the FSA will normally write to the candidate setting out the key points of the discussion, which will include its understanding of the person’s priorities during their first few months in post, and any action points agreed, which the FSA will follow up as part of its normal supervisory activity. A copy of this letter will also be sent to the firm.

Contrast that with what has been happening here!  The only apparent change in approach is that Gillian Bowler, chairman of Irish Life & Permanent Plc has abandoned her sunglasses indoors so that she can observer venality without ‘rose tints’. The Committee Stage of the NAMA legislation ought to provide an imminent opportunity to press this important matter into the statute books.

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.