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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Greencore Plc

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

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

 

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

 

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

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

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

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

 

Smurfit Kappa Plc

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

 

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

 

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

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

 

Aer Lingus Plc

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

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

Moral hazard of nationalising Anglo Irish Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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