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.

Response of dithering Taoiseach to Boucher pension deal is devastating

I watched with quivering embarrassment, revulsion and genuine horror, as Brian Cowen, our Taoiseach, waffled on Monday in Tullamore and again yesterday in the Dáil Éireann about the €1.4 million spent by the Court jesters of Bank of Ireland bloating the pension entitlement of their chief executive, the esteemed insider, Mr Boucher.  Cowen states that he has no legal power to intervene in this sacred contract between rational parties, but suggests that it would be ‘helpful in public perception terms’ if Boucher refused to accept the bloated pension.  Cowen urges public sector workers, who are to vote on a pay freeze of indeterminate duration, that they ‘should see the big picture’.  I have no doubt they will and see it very clearly.  They will see it in kaleidoscopic clarity.

That, my dear readers, is precisely how the Irish financial system was regulated by flaccid, stuttering, incompetent, bow-legged, politically compromised morons and gobshites, before the economy collapsed from exhaustion in early 2007 with a half million people lost their jobs and everybody’s equity holdings fleeced to near extinction. 

The verbal and leadership skills of our regulators and leaders did not move beyond nuanced euphemisms and when combined into paragraphs these looked and sounded as robust as a pre-fabricated hen house in a raging storm.

When a chief executive presides over a company that loses €1.8 billion, equivalent to no less than 98% of its market capitalisation and that loss is substantially attributable to his own decisions, what usually follows is the presentation of a crisp P-45.  Very few are presented with a gilded pension allowing them to retire with defined benefits of a magnitude that is beyond the range of most people.

Cowen will down in history as the most dangerous Minister for Finance the country ever had; the Minister who supervised an expansionary credit bubble that has beggared the nation the consequences of which he never understood.  As Taoiseach, he presents as a delusionary, curmudgeon who blames everyone but his own ineptitude for what has transpired. and never a word of apology.

His body language and demeanour when referring to Boucher has been as taciturn as might be anticipated had an elderly, blind, poodle piddled beside him on the floor of a convent parlour.

Contract, or no contract, this is a matter of fundamental public interest, morality and moral authority - the Taoiseach's moral authority.

The value of the Bank of Ireland Staff Pension funds are reporting a deficit of over €1.6 billion, a deficit that has increased by over 200% since 2008.  The funds' assets are now less than 70% of the present value of future obligations.

If this adverse trend were to continue, even at a more moderate rate of deterioration, there is a real and grave threat that there will not be enough resources to pay Bank of Ireland pensions' in full.
How would Fianna Fail and Green Party candidates feel about canvassing Bank pensioners' in forthcoming elections if they are only receiving forty or fifty percent of the pension payment they are entitled to and personally paid for, against a background of the Taoiseach's apparent indifference to the Boucher gilded pension deal that has been funded from gigantic Bank of Ireland losses and bailout money?

Bank of Ireland’s response to CIROC Report

The publication of the Annual Report of Bank of Ireland for the nine months ending 31 December 2009 provides the first opportunity to see how the Bank is complying with the recommendations of the Covered Institutions Remuneration Oversight Committee (CIROC).

Their recommendations were contained in the report made to the Minister for Finance on 27 February 2009, two days after the appointment of insider, Richie Boucher, as chief executive of Bank of Ireland was announced. 

 

Position	Recommended by CIROC – adjusted for 9 month period	Actual
R Boucher Chief Executive	€517,500	€1,996,000	including a pension fund top-up of €1,490,000
P Molloy Governor	€138,000	€194,000	for six months from 3 July 2009
Chair of Major Committee	€51,750	€86,000     €96,000   €60,000   €60,000 €67,000	Deputy Governor and senior independent director Group Audit Committee Group Remuneration Committee Court Risk Committee Pension Fund Trustees
Ordinary board member		€41,250	1 @ €26k for 3 months 1 @ €37k for 6 months 2 @ €59,000 1 @ €65,000

 

Boucher’s Pension

Directors’ of the Bank of Ireland are members of the Bank Staff Pension Fund, a defined benefit plan, which is a contributory scheme at the rate of 2½% of salary. Benefits are based on an accrual rate of ^1/₆₀ of pensionable salary for each year of a Director’s pensionable service with a maximum of ⁴⁰_/60th payable on normal retirement, at age 60.

Boucher became joined Bank of Ireland in December 2003. He was appointed an executive director on 6 October 2006; chief executive on 25 February 2009.

His normal retirement should be in 2017 at which time he would have accumulated 13 years of pensionable service providing him with a pension of ¹³_/60th of his final salary - €261,625 based on prevailing rates. But the impact of this deal is that can take a hop, skip and jump at the age of 55 with close to €400,000 in his pocket.  That is over twice the salary of the Minister for Finance and significantly more than all top-level office holders whose positions are of systemic importance.

Pension Fund Deficit

The Bank Staff Pension Fund is running a deficit of €1,631,000,000 and its assets are only capable of meeting under 70% of the present value of its obligations amounting to €5.3 billion. How is it possible for a pension fund with a deficit of this order to take on additional burden?  What tone does this decision indicate to staff and stakeholders’ generally?

This pension fund was closed to new members from 1 October 2006, five days before Boucher became an executive director and the only exception was in respect of entry-level employees who joined Bank of Ireland between that date and 21 November 2007. All others are obliged to become members of the Bank of Ireland Group Pension Fund of the group’s UK pension fund – both of which are hybrid schemes which include elements of a defined benefit and a defined contribution scheme.

The CIROC Report is scathing in its criticism of bank top-management who make little, or no, contribution for their pensions and advocated that pension arrangements for senior executives should be at least broadly similar to those applicable to the generality of the staff. How many staff in Bank of Ireland can retire at the age of 55 with 11 years’ service and a pension based on 59% of their salary?

Share Ownership Policy

The Annual Reports of Bank of Ireland for 2005, 2006 , 2007 and 2008 states that ‘executive directors are expected, over time, to build a Group stock ownership equivalent to a minimum of 100% of salary’.

Boucher owns 33,127 ordinary shares in Bank of Ireland. If he were as attentive to this policy as he expects the Bank to be to his pension he would own a minimum of 543,307 ordinary shares.

Perhaps Boucher and Molloy could approach the Boucher pension issue with the same level of indifference that he displays towards the share ownership policy.

Scope for Anglo Irish Bank to become a ‘business bank’ very slim

An objective cited for bailing out Anglo Irish Bank and committing €22 billion to date is that Anglo would become a business bank in due course.  But, of course, AIB and Bank of Ireland will also need to become business banks, even if operating on a diminished scale.  What scope is there for all three to be ‘business banks’?

Anglo reported a loss of €12.7 billion on a loan book of €72.1 billion – all property related, including hotels and restaurants.  How realistic is the proposition that a bank where the average remuneration by employee is over €88,000 per annum but where the loss per employee exceeds €7.5 million become a business bank?  The patron of Anglo Irish Bank since nationalisation, the Department of Finance, employs 634 civil servants whose average pay in 2010 will be €55,678

The scale of borrowing by Irish residents  in areas outside construction, property development, hotels / restaurant  and residential mortgage lending is:

 

€ Million	June 2009	Sep 2009
Agriculture and Forestry	5,341	5,210
Fishing	381	374
Manufacturing	7,821	7,559
Electricity, gas and water supply	1,015	1,100
Wholesale trade and repairs	13,236	12,965
Transport, storage and communications	3,283	3,225
Financial institutions	86,181	86,206
Education – schools and colleges	823	856
Health and social work	2,638	2,660
Community, charity, social	2,926	2,843
Personal finance for investment	2,659	2,726
Other personal finance	19,210	17,638
	€145,514	€143,362
Mortgages, property development, construction, hotels and restaurants	€240,876	€233,886
Total borrowing by Irish residents	€386,390	€377,248
	(62%)	(62%)
Anglo Irish Bank	15 Months to 31 Dec 2009	Year to 30 Sep 2008
Staff costs	€186 million	€206 million
Average number employees	1,681	1,864
Average cost per employee	€110,648	€110,515
(Loss) / Profit for period	(€12,702 million)	€664 million
(Loss) / Profit per employee	€7,560,381	€356,223

 

 

 

Pathetic half-year at Bank of Ireland

THE Interim Report of the Bank of Ireland for the six months ended 30 September 2009 provides the first public insight into the stewardship of chief executive Richie Boucher, the insider chosen by the Court of Directors, to be chief executive last February.  The results will do little to fortify shareholders or inspire taxpayer confidence either in him, or in the Court of Directors that selected him

A loss of €979 million is recorded.  The level of impaired loans has increased by a whopping 61% from  €3,249 million to €8,571 million – 2.4 times the amount invested by taxpayers this year. 

The impairment charge on loans and advances to customers increased to €1,787 million (+561%)  for the six months ended 30 September 2009 and compares to a charge of €267 million for the six months ended 30 September 2008. Income declined €273 million from €2,003 million to €1,730 million while operating expenses were €99 million less.

The accompanying presentation includes many expression in pidgin English including the mandatory crap about the ‘challenging operating environment’ .  Do these morons’ ever acknowledge that ‘outlook’s’ are always ‘challenging’.  ‘Challenge’ is the essence of the free market environment.  Competence to challenge effectively and successfully is the elusive ingredient that separates the reassured performer from the fly-by-night chancer.

The leadership of the Irish financial sector are the authors and architects of that operating environment and they are now its pall bearers.  Ego-centricity, insatiable greed and unadulterated hypocrisy are their defining features of those who kicked and mutilated all vital economic organs of Irish society.  They were as content seeing house buyers ripped off over the past five years as they are putting their snouts into the taxpayers’ resources to compensate the venality.

The word ‘challenging’ should be left to Mr Barrington and his colleagues on the board of Aer Lingus while the financial sector could usefully use the word consequences much more extensively instead. The ‘good businesses’ and ‘resilient business models’ of Bank of Ireland are mentioned several times.  But is there anything that is either ‘good’ or ‘resilient’ about these results?  Perhaps the expression ‘delusional’ would have been more honest.

The slogan that really piqued by curiosity was “we are committed to achieving more conservative balance sheet metrics”.  Perhaps someone who has contacted a sexually transmitted disease is just as similarly to say “I am committed to achieving a more sustainable and defensible lifestyle and I promise not to continue infecting innocent people”

The Boucher Legacy

These results are the first instalment of the Boucher legacy. Are any further instalments necessary?

Boucher was in charge of Retail, Republic of Ireland since November 2005 and he flooded the supply and buy side of the property sector with credit.  This Division returned a loss of €655 million against a divisional income of €720 million.  Chief executives in the US and other markets who return results as appalling as these are typically fired before they even reach the public domain.

Ireland accounts for €34 billion of the €87 billion in the Bank.  Loans to Irish customers in the most recent six months totalled €62.4 billion and the total loan book was  €135 billion. 

€28 billion of retail loans were in Irish residential mortgages; €16 billion was lent to the property and construction sector in Ireland; €15.4 billion was lent to the productive small and medium Irish enterprises and €3 billion was lent to Irish personal customers.  In summary – 70% of loans in Ireland were to the property sector and total Irish lending was equivalent to 183% of Irish customer deposits.  Ireland provides 39% of total deposits at Bank of Ireland but accounts for 46% of its loans and advances which are heavily skewed in favour of the property bubble.  That is Boucher’s direct legacy. 

The market capitalisation of Bank of Ireland is in currently in the region of €2 billion.  This compares to the €3.5 billion provided this year by Irish taxpayers to shore up a rapidly eroding capital base.

Bank of Ireland Life actually returned a profit of €57 million in the six months to 30 September 2009.  The person in charge of this was Des Crowley who preceded Boucher as Head of Retail in Ireland.  He has not taken over Boucher’s poisoned retail chalice.

 

Executive Director Shareholding

There has been a long-standing policy at Bank of Ireland that executive directors would over time build a beneficial share ownership in Bank of Ireland equivalent to 100% of salary.  The following summarises the extent to which this policy has been executed.

Maurice A. Keane

Keane was group chief executive from February 1998 to February 2002.  His total remuneration in 2001-02, his final year of tenure was €955,000.  He owned 1,189,280 shares at 31 March 2002 which were worth €14.75 million at that time.  He fully complied with the policy.

Michael D Soden

Soden was group chief executive from 1 March 2002 until he abruptly resigned  29 May 2004 after it was discovered that he was trawling the web sites of escort agencies in Las Vegas on his office computer.  Soden earned €3.18 million during his two years and two months at the helm.  But his ownership of Bank of Ireland shares only increased from 87,595 to 89,756 and these had a value of €1.22 million when his dreams of good times in Las Vegas were at their most intense.  This would have been equivalent to 78% of Soden’s salary in 2003-04

Brian J Goggin

Goggin had worked at the Bank since 1969 and had high hopes of succeeding Keane only to have his eye wiped by Soden.  He succeeded Soden as group chief executive on 3 June 2004 and held that position until February 2009.  He earned a total of €14.5 million in remuneration as chief executive.  Goggin owned 334,126 Bank of Ireland shares when he got the top job and these were worth €3.5 million in June 2004.  His shareholding increased to 600,260 on 31 March 2008, the last date his shareholding was reported in the annual report, and would have had a value of €5.65 million then but would have been worth €312,135 by March 2009. This shareholding in 2008 would have exceeded Goggin’s highest level of total annual remuneration of €3.998 million - in 2006-07.

Richie Boucher

Boucher only owned 1,906 shares when he was first appointed to the Court of Directors in 2006.  He owned 33,127 ordinary shares on 31 March 2009 after he was appointed group chief executive.  Boucher’s shares are currently worth approximately €66,000.  The porters’ at some of the Bank’s branches probably own more shares.  But what can one presume other than his shareholding is a reflection of his confidence in the Bank?

The two other executive directors own significantly more shares.  Des Crowley owns 128,915 ordinary shares and John O’Donovan owns 108,326 ordinary shares. Boucher’s soon-to-depart counterpart at AIB owns 256,780 ordinary shares in AIB.

Boucher’s remuneration from the time he became a member of the Court until he became chief executive was €3.5 million.

No evidence of any mid-year green shoots of recovery

Today is the first day of the second half of 2009 and the latest data to assess our economic wellbeing does not provide grounds for reassurance, optimism or encouragement.

Employment and Unemployment

One of the great consequences of our EU membership and the economic growth that it enabled was the expansion in employment numbers and in the population of the country. Approximately one million people had a job in Ireland around 1990, a period when all the economic indicators and the level of government debt and the interest liability on it was punitive. Our labour force in March of last year comprised 2.23 million persons. A year later, 1.965 million persons had a full or part-time job in Ireland, a fall of 7.5%. The number unemployed at the end of March was 222,800 - an unemployment rate of 10.2% that has subsequently exceeded 11%. The most worrying aspect is that the long-term unemployment rate has increased from 1.7% last October to 2.2% last March.

There were over 418,000 persons listed on the Live Register at the end of June, an increase of over 197,000 in twelve months. This number includes persons unemployed , part-timers and seasonal workers.

 

Gross Domestic Product

Personal consumer spending, in volume terms, was 9.1% lower in the first quarter of 2009. Capital investment declined by 34.1 per cent in the first quarter of 2009 compared to the first quarter of 2008. This has resulted in a record GDP contraction of 8.5% in Q1 2009.

Anglo Irish Bank

The first Interim Report, since nationalisation, for the 6-month period to 31 March 2009 indicated that the capital base of this wretched bank has been effectively wiped out. There was an instant demand for a €4 billion capital investment by the Government with the high probability that a further €7 billion will be necessary.  The Government parted with €3 billion this week and God alone knows what the owners of that money will ever obtain for it.

This Bank built its business almost exclusively on property development and speculation. The hypothesis upon which it functioned was predicated on its customers achieving a 30-60% cash return on the sites they developed. The ensuing burden eventually mortally crushed the financial spine of struggling house buyers and the taxpaying public are now expected to bridge the enormous and unascertainable gap.

But the taxpaying public have not been introduced to the interplanetary world of bling-incarnate and the faces and the circumstances behind these impaired loans.

The public have been told about a proposed business plan that is intended to:

• Rebuild trust and confidence in the Bank
• Maximise the recoverability of loans, and
• Reduce the cost base

Rebuilding trust and confidence

A fundamental component of trust and confidence is candour, honesty and openness. The conclusion of the protracted but ongoing investigation by the Garda Fraud Squad and the Office of the Director of Corporate Enforcement is an absolute prerequisite.  Bernie Madoff needs some shamrock-wearing, shillellagh-shaking companions from the universe of moral hazard!

Ireland’s contemporary introduction to the concept of ‘systemic importance’ was in 2007 when the palaver was put about which suggested that the massive high-density developments proposed for Ballsbridge, Dublin with projected construction costs north of €1 billion, would ‘have to win planning approval’ because the big property developers were ‘too big to fail’. No consideration was given to the economic sustainability of this development at a consumer level by Anglo and other finance providers. The developer who described economic commentators then as ‘laughing hyenas – harbingers’ of doom and gloom’ has proven to be myopic and certainly not infallible.

Anglo is now a State owned business with a single shareholder. It is no longer a business with 17,111 shareholders’ who owned 89.2% of the equity; - who were fed a bill of fare by your predecessor about “the excellent performance…of a relationship based business … grounded in the Group’s disciplined and focused business model … prudent risk appetite and very limited exposure to areas affected by the current credit market issues”.

 

Maximising the Recoverability of Loans

The most devastating information in the Interim Report is that Anglo Irish Bank, the State-owned bank lent €175 million to 10 directors and 2 managers and that €31 million of this is impaired, against corresponding deposits of only €20 million - €8 million less than a year earlier. This is not merely a debt but it is the stripping away of national self-respect. What other State system of corporate governance would tolerate incumbent directors of major public companies being a party to impaired directors’ loans raised in a bank of which they were directors and appointees to the Risk and Compliance Committee?

The impaired loans of directors and managers of Anglo align Ireland more closely with Harare than with London, Frankfurt, New York or Geneva. What is the difference between the Zimbabwean taxpayers’ picking up the tab for the extravagant shopping trips to Hong Kong and Paris by Mrs Robert Mugabe while their citizens die from cholera? The difference with Ireland is one of scale and disease type. Our liabilities are much greater and our people will die of cervical cancer rather than cholera because resources committed to Anglo are not available for cervical screening.

Secondly, will this incidence of directors’ loans impairment not set a very low ceiling on the prospects of debt recoverability, causing further exposure to moral hazard? Developers will be thrilled and their legal advocates will argue that their client’s obligations should not be dealt with differently, or more urgently, than those of the directors’ and mangers’ who recommended and approved their loans, possibly completed on-site reviews at least twice a year and stress tested the impact of potential adverse consequences.

Religious congregations on whose sites half-finished properties exist will wonder will they ever reap the agreed selling price that was to have been paid on project completion.

Reducing the cost base of the Bank

The bonus culture meant that average salaries at Anglo Irish Bank almost equate in extravagance to the salary and pension combination of politicians. The average salary reported in the Interim Report is equivalent to €96,976 for staff numbers reduced from 1,922 to 1,753. This is a reduction of the corresponding annual figure of over €137,000 in 2006 and 2007.

The average salary estimated to be paid in 2009 in the Department of Finance is €58,600. The average salary estimated to paid, in 2009, in the Office of the Director of Public Prosecutions, who will hopefully be directly involved with former executives of the Bank, is €68,635. The average at Bank of Ireland, a business like that of Anglo, with activities in Ireland, Britain and the US, is €74,426.

When this is considered in the context of there being no value added at the Bank since September beyond dealing with existing customers the overhead seems exorbitant.

Credit Crunch

It is not surprising that as personal consumption collapses through lack of confidence that that demand for credit is also lower. Outstanding private sector credit amounted to €389.6 billion at the end of May.  This declined by €981 million, €185 million of which is attributable to lower personal credit in May. But the overall amount outstanding is equivalent to over  twice the annual level of total personal consumption on goods and services – in other words, a lot of lolly.  That explosion of private sector credit mirrors what occurred in Iceland.

There were 2,203,000 credit cards in issue to individuals in Ireland at the end of May, a number broadly comparable to a year earlier. New monthly spending on these personal cards has moderated from over €1 billion in June 2008 to €801 million at the end of May. The growth in the level of indebtedness of them at the end of May has moderated to 0.1% compared to 4.4% last January and 19.6% in March 2007. Residential mortgages fell by over €100 million in April and by a further €18 million in May, a trend that is not surprising when the number of planning permission sought in Q1 2009 was 23.7% lower than a year earlier.

Ireland’s contrasting economic spectrum

The Bank of Ireland has published its annual report for the year ended 31 March 2009.  This shows that while the Bank lost €7 million and has impaired loans of over €1.51 billion, that directors’ emoluments exceeded €8.68 million, split between 7 executive directors and 10 non-executive directors. 

The report advises that these emoluments are calculated using a ‘suite of tools’.  Directors’ emoluments in 2008, when the Bank made a profit of €1.84 billion and had an impaired loan charge of a mere €232 million, were €10.73 million. The share price and market capitalisation of Bank of Ireland on 31 March 2008, was €9.42 and €942 million and it had a 12.6% ISEQ weighting.   Brian Goggin was CEO since 2005

The share price and market capitalisation of Bank of Ireland on 31 March 2009 was €0.50 and €502 million and it had a1.8% ISEQ weighting.  Richie Boucher was recently appointed CEO then and his tenure continues. His very own Retail Division is responsible for €708 million of the group impairment charge.  The total value of impaired loans has increased from €1,062 million to €5,322 million, of which €3,538 million is attributable to property and construction.

This outcome is the culmination of an orgy of lending by the Bank to the property development sector.  The head of the Retail Division, African-born Boucher, sought to emulate the sure-footed, inspired ‘golden touch’ and prowess of Anglo Irish Bank and its then Chairman, Sean FitzPatrick in the jungle of the property sector, a jungle that was based on young, working people buying modest homes in distant locations for up to 15 times their household income.

The people of Ireland, through the Government, invested €3.5 billion last February to shore up the Tier 1 capital at Bank of Ireland, a decision that was overwhelmingly approved by the dividend-deprived  stockholders last March.

YE 31 March	2008	2009
Staff costs	€1,235.000,000	€1,181,000,000
Staff numbers	16,026	15,968
Average pay	€77,062	€73,960

 

The current Governor, Richard Burrow, a man of impeccable sense, is to vacate this role and acknowledges that “accountability for these losses must be taken at the top”.  But since Bank of Ireland is not a one-man show, who else comprises “the top”? 

Burrows advises that Bank of Ireland is working to restore the trust of customers, stockholders and the public in general.  The votes are being counted today in the nation’s local, European and by-elections after which a new panel of politicians will have received a mandate from voters.  There is no comparable scope for society to confer a mandate on institutions and individuals’ in charge of them whose decisions have an enormous bearing the lives and wellbeing of thousands of citizens.  Perhaps there is scope for a doctoral thesis to analyse and explain this.

Taxpayers’ need look back no further than the consequences of the half-year results announcement at Anglo Irish Bank -  and an immediate requirement for €4.5 billion for an illustration of this.  It will be interesting to observe the progress of the ‘trust restoration process’ in the country’s ‘systemically important banks’ and what ‘suite of tools’ and ‘suite of clichés’ will be deployed by these people with the strange sounding accents and ‘scared rabbit staring vacantly at the headlights’ demeanour.

The consequences of the lousy management of the appalling management and this bank and all of the other covered institutions (that is, Irish banks eligible for a State bail out because the Government deems them to be of systemic importance) has resulted in record numbers entering the Live Register.

 

	Live Register	Seasonally Adjusted	< 25 years old
May 2008	201,756	207,000	42,730 (21%)
May 2009	396,871	402,100	84,488 (21%)
YOY Increase	+195,115 (96%)	+195,100	41,758

 

The loss of 58 jobs in the Bank cannot blamed for the record increase in the numbers on the Live Register.  This is not a measure of unemployment because it includes individuals working a 3-day week and casual and part-timer workers who are eligible for welfare benefits.

The Moral Hazard of the Banks' Bail Out

Six Irish banks are being bailed out by the State because of their systemic importance. This is supposed to mean that the consequences of their failure would have an adverse, far-reaching impact on the economy and the financial welfare of the country. Taxpayers are naturally concerned that if large scale public resources are committed that these are used to create repair a problem not to make those who caused the problem richer and this can arise in many ways including the valuation of assets and liabilities and through the derring-do of executive and non-executive leadership.

The resources required in Ireland to bail out banks are enormous in the context of our resources – potentially 50% of Gross Domestic Product. If Ireland were to experience a 10% drop in GDP this year, which could happen, the recession we speak of would become a depression. Foreign lenders are becoming ever more cautious. Tax revenue has collapsed from €47 billion in 2007 to a potential €34 billion in 2009. Taxes and levies have been raised several times in the past 12 months and Government spending has been curtailed. These initiatives are designed to impress lenders and the rating agencies' but it will aggravate the downturn. The guarantees and the direct investment provided to the banks could even strain the long-term solvency of the country and this puts further strain on the country.

There are many uncertainties in relation to the bank bailout and one of these is the consequence of moral hazard. Moral hazard arises when banks make choices in the light of Government support that would not make were this not available. A glaring example relates to the disclosure of losses arising from impaired loans. Last week AIB announced that it has increased the amount being set aside to cover impaired loans from €106 million to €1.8 billion. Irish Nationwide Building Society has announced a loan loss impairment charge of €464 million, increased from €48.8 million in 2007. The loan loss impairment charge was €17.6 million in 2006; €27.2 million in 2005 and €6.5 million in 2004.

Following the publication of a 9-bullet point press release last Friday, the Taoiseach has announced that this institution is to join the bailout fraternity. Irish Nationwide announced a loss of €243 million after this very large loan loss impairment charge. The common understanding of a building society is that of providing house loans to members from the proceeds of members' savings. The risks involved would be fairly widely dispersed and thus moderate.

Irish Nationwide had residential mortgages of €2.547 billion in 2007, down from €2.599 billion in 2006. 98% of these were in Ireland and 28% related to houses in Dublin. But Irish Nationwide also had commercial mortgages amounting to €9.785 billion of which only 37% were in respect of Irish properties (16% in the Dublin area). 53% of the commercial mortgages were in Britain (34% in London). The total loan book in 2007 was €12.332 billion. This has was reduced to €10.474 billion in 2008.

Ireland had become very dependent on tax revenue derived from construction such as capital gains tax, stamp duty and corporation tax. But the drop in tax revenue from these sources has been dramatic reflecting the burst bubble of the construction sector. Capital gains tax has dropped by 54%; stamp duty by 48% and corporation tax by 20%.

The reserves of the Society in 2008 were stated to be €1.2 billion, a reduction from €1.51 billion in 2007. However, the 2007 figure included a property revaluation reserve, of which €67 million, but the property values of 2007 no longer prevail.

Irish Nationwide makes a point each year of commenting on its cost-income ratio which in 2007 was 17%, “which continues to be the lowest of any Irish financial institution”. A wonderful accomplishment when directors’ emoluments amount to €3.49 million – 78 times the average annual pay of the 400 staff of the Society (€44,500).

If 50% of Irish Nationwide's loan book concerns transactions outside this country, to what extent is it of systemic importance to Ireland? How valuable is the Irish Nationwide franchise? A strong franchise is derived from a strong competitive creates pricing power and a status that can make it a sought after acquisition target. Why did Irish Nationwide never cede its mutual status and become an acquisition candidate? Does its reluctance offer any insight into the real quality of its business and prospects? Are its problems fundamentally different in character to other covered institutions?

The moral of all of this generally is that taxpayers need to be extremely vigilant as to whether Government intervention repairs the banks and building societies, or merely affords an opportunity to those who control them to enrich themselves through ‘adjustments’ that would never see the light of day if Brian Lenihan was not standing by with buckets of your hard-earned money! The issue concerns what is called ex post accountability - whereby problems are resolved after uncertainty has been resolved, or thought to be resolved. But as we are living in a country where the Finance Minister indicates that serving politicians are to forego political pensions, while serving in elected office and less than two weeks later his boss indiciates that this measure will only apply to the politicians of tomorrow, doesn't inspire confidence that this Government has the savvy to really understand the implications and vulnerabilities of its bail out initiative.