Minister's secret deal bodes ill
What is going on inside Allied Irish Bank, once the biggest and most successful financial institution in the State? We all know and have known for a long time that it is a basket case because of the highly irresponsible attitude to lending, and the hapless attempts to deal with the ensuing crisis which amounted to gross incompetence and denial of reality.
The Minister for Finance went to the High Court on Thursday, essentially to get the go ahead to pump another €3.7bn of taxpayers' money into AIB -- thus bringing the amount we have put into the bank to date to €14.1bn. It was an emergency measure, but only in the sense that it was a measure left until the last minute. The use of the High Court was necessary only to allow the minister to sidestep the shareholders of the bank.
Belatedly, we have a regulator and a Central Bank governor who are serious about making our banks live up to their obligations to operate within boundaries that make sense in business. This means that although AIB has no money and owes tens of billions, it must still match up to the standards of a solvent bank if it wants to stay in business. Up until the moment the minister intervened on Thursday, AIB had no hope on hitting that target.
But Thursday's injection of cash was just a stopgap measure. It was not the finish of this desperate attempt to rescue AIB from itself. In another month, we, the taxpayers, will have to do it all again -- on the double. The bill then will be another €6.1bn. This time the money will be needed to keep AIB within that other strait-jacket -- the one imposed by the EU/ECB/IMF recently.
This is effectively the nationalisation of Allied Irish Banks -- a solution which was stoutly resisted by this Government when it could have proved a more effective and much less painful measure. In fact, the whole idea of nationalisation was portrayed as communism, to be avoided at all costs. When the Government eventually caved in on that particular core principle, it did it in the most disastrous manner possible -- by nationalising Anglo Irish Bank, a toxic entity that should have been allowed to disappear from the commercial landscape. Instead we, the people, had responsibility for its massive debts thrust upon us, thus making our recession problems immeasurably worse and leading us inexorably to the point where we had to approach the EU, the ECB and the IMF for a bailout.
Our Government not only took on responsibility for all bad bank debts in one way or another -- through nationalisation or through Nama -- but added to our woes by becoming totally inflexible on the question of bond default or even serious renegotiation of the terms of our very substantial bond issue. Now AIB management says it is considering a voluntary deal seeking to share losses with subordinated bond holders to whom it owes €4bn.
Recently, AIB management have been conducting fire sales of some of its few remaining assets -- in the US and Poland -- that are of any value, but the return has been disappointing. The target was €9.8bn. The return was less than €5bn. And last week it was revealed that AIB had suffered a €5.5bn loss on the sale of €9.3bn in property loans to Nama at a 59 per cent discount. There seems little reason to believe their efforts with the bondholders will be any more successful, or their attitude in negotiations any more resolute, than that of the Government in achieving what was effectively a bailout package from the EU and the IMF for AIB and the other banks.
AIB will now join those it would have once looked down on -- Irish Nationwide, Anglo Irish and the EBS -- as State-owned companies.
The reputation of AIB has been tainted many times over the years, from the ICI scandal in 1985 to the €2m fine by the Financial Regulator only last week for inadequate redress to overcharged customers and several other episodes in between.
All of this is known about AIB. It is not plausible that there could be more to hide, and yet the minister chose to make his application to the High Court in secrecy because of matters that, his lawyers said, were of "extreme commercial sensitivity". Whatever it is that the minister and AIB are hiding from us, it is hardly good news. So, we know the situation is awful at AIB. What the minister's in-camera move tells us is that it is awful -- and then some.
Brian Lenihan said in an interview with RTE last week: "We wouldn't have had AIB on January 1 if this investment wasn't made." Leaving aside the inconvenience to customers, which can be ameliorated with proper logistics and timing, it is not unreasonable to ask: "Would that have been such a bad thing?"
Originally published in
