The board minutes that show AIB's road to disaster
If you want to really understand what it was like inside one of the Irish banks during the boom and bust years, you could do a lot worse than peruse some of the documents published as appendices to the Banking Inquiry report. They really are a treasure trove.
I am not sure they were worth the €6.5m cost of the inquiry, but you might as well read them, given that you have paid for access to them.
Take AIB for example. It ended up costing the taxpayer around €20bn. Yet in March 2007, international consultants Oliver Wyman made a presentation to the AIB management conference called 'Poised on the Edge of Greatness'. I kid you not.
It emphasised how AIB's performance at that time had been overshadowed by the likes of Anglo Irish Bank, which Wyman declared the best-performing bank in the world in 2006.
The presentation urged AIB towards this greatness by saying its "current position can be improved through faster growth without sacrificing risk discipline" and said that good precedents existed for this.
Under the heading of "targeted risk taking", it cited Anglo Irish Bank as a "once poor performing subscale bank lacking strategy" but one which had targeted the higher-risk commercial property and development market and had "caught the wave of Irish property boom combined with outstanding execution."
When asked about this presentation at the banking inquiry's public sessions, former AIB chairman Dermot Gleeson dismissed it, saying "consultancy reports, as you know, are full of sentiments about the future being great."
Other documents show just how pumped up these management conferences got, as executives repeatedly compared themselves to Anglo. This included bullet points such as "Double-digit growth is the benchmark" and "We must deliver on stretching budget targets to legitimise our business model."
There has been an assumption in recent years that during the boom, somehow the banks failed to test their loan books for future shocks or somehow didn't bother assessing the risks. The documents show they did all of these things but just managed to come up with the wrong conclusions or failed to act.
At times, those in charge of risk voiced how AIB, for example, needed to keep working on improving its own data about its loans and clients. After all, risk officers can only work with the information that is available.
Not only were the board at AIB aware of its excessive exposure to property lending, they knew they were in breach of the financial regulator's limits on concentration of risk assets as far back as 2006 - but kept on going. Even worse, the regulator (IFSRA) was aware of it but didn't tell them to stop.
One presentation to the AIB board in July 2006 by head of group credit review, Kevin Garvey, sums it up well. Garvey told the board the bank was in "breach of the limit contained in the Central Bank's Licensing and Supervision Requirements and Standards for Credit Institutions", which said a bank should not have risk assets of more than 200pc of its "own funds" concentrated in any one sector or economic activity subject to a common risk factor. The limit for any two sectors was 250pc.
Garvey told the board that AIB's exposure to property, building and construction amounted to 260pc in July 2006.
He added that it had been discussed with IFSRA, "who did not regard it as a significant issue." AIB even told IFSRA that the breach was likely to continue and it had not requested that AIB change any of its existing practices. Garvey suggested that other banks were also in breach.
The board minutes go on to say that "while a breach of the standards might be fully understood at local regulatory level, it could potentially give rise to issues on foreign filings."
This concern about US filings got the attention of the chairman Dermot Gleeson, as the board minutes say he directed Garvey to "investigate forthwith …whether the breach had implications for the sign-off of the Form 20F or the like", which is the US SEC equivalent of an annual report. The minutes don't feature any questioning of the wisdom of such an exposure.
The concentration on property lending got worse. By April 2007, it was 332pc of own funds, and by September 2008 (the month of the state guarantee) it was 390pc.
When asked about it at the inquiry hearings, Dermot Gleeson said at first he asked "was this serious."
He said he was reassured that it wasn't because IFSRA were relaxed about it. IFSRA was relaxed, he said, because it was a "crude" standard that "lumped a lot of non-homogenous properties together…you know 10 acres with no zoning outside a provincial town was treated the same as an office block in the centre of Warsaw or Dublin."
Gleeson went on to tell the inquiry it wasn't a statutory instrument or a rule, "it was a guide for supervision of the banks."
He went on to say, however, "that we would have been blessed if we had kept to it..."
By October 8, 2008, just eight days after the state had guaranteed all of the bank's liabilities, the tone of the board meetings had changed dramatically. It was as if the non-executive directors had been spurred into greater action.
Board minutes show that the non-executive directors had their own private meeting before bringing in the executives. Dermot Gleeson hit the executives with a list of six questions the non-execs wanted answered.
First up, he wanted to know the value of loans on which interest was not being paid or not being paid in full. Finance director John O'Donnell told the board "information about interest roll-up was not available from the Bank's accounting system and that a manual exercise would be required to obtain that information."
At this stage it was all too late. The die had been cast and AIB was already poised, not on the edge greatness, but of disaster.
Plenty waiting to tap Noonan's 'rainy day fund'
Listening to politicians ahead of the election, one might think the Irish economy is also poised on the edge of greatness. Slashing the USC, spending heavily on public services, capital projects and fixing the health system are all in the mix.
Michael Noonan suggested during the week that the new government will have around €10bn of headroom or space with which to cut tax and increase spending. He is promising to set aside around a quarter of that (€2.5bn) for a rainy day fund in case of a downturn.
The Fiscal Advisory Council doesn't see the €10bn but thinks that after allowing for additional cost of public services due to population growth and other necessary spending, the headroom is about €3.2bn.
The idea of a rainy day fund is good. The last one we had left around €20bn available to help with the crash. But the National Pension Reserve Fund wasn't meant to be a rainy day fund. It was a pension fund.
It still has around €6bn currently being invested in Irish businesses, plus the stakes in the banks. Proceeds from bank share sales will probably go to pay off debt. But what about funding those pensions?
The bill into the future could be around €120bn. Looks like we need a rainy day fund, a pension fund, and a whole lot of other funds.
It will be a miracle of loaves and fishes proportions to extract that out of €3.2bn over five years.
Sunday Indo Business