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Ireland's political and cultural magazine
44 July 2021
R
ETAIL BANKS in Ireland perform a very odd
sort of alchemy: they turn gold into dross,
mountains of it. Or at least that is the opin
-
ion of institutional investors. This can be
inferred from the performance of the shares
traded by mainly international institutional investors
in Bank of Ireland, AIB and PTSB.
Cascading Share Prices
By June 2021 bank shares were all dramatically down
on their highest trading prices. Bank of Ireland and
PTSB both peaked in January 2018, but are now down
37% and 54%, respectively. Most calamitously, AIB
shares are 66% down on their high of 25 May 2017.
It might be thought that, when this is taken into
account, the banks’ share price could fall no further,
but, as shareholders in AIB and PTSB found out in 2011
the share prices only stopped falling when they reached
zero.
All this might only be of interest to those wealthy
enough to personally own shares themselves: sover-
eign, institutional and hedge fund managers; equity
dealers and anyone who has a private pension plan,
except for the fact that Irish taxpayers, through the gov-
ernment, own:
74.9% of PTSB;
71.25% of AIB; and
14% of Bank of Ireland.
The Department of Finance valued these stakes at
€12.5billion in 2017 but at only €4.6billion in its latest
figures. Bank executives managed to destroy almost
eight billion euro of public shareholder value in two
years.
Someone Else’s Money
This outcome was, perhaps, not as surprising to some
as to others. At the time of AIB’s flotation, its three most
senior executives (the Chairman, Richard Pym; Chief
Executive, Bernard Byrne; and Chief Financial Ocer,
Michael Bourke – the people with the most responsi
-
bility for, and knowledge of, the bank’s financial
performance), each bought a token 2,000 shares. From
the time of these purchases until their departure from
By J Vivian Cooke
Bankers
Fourth-division calibre on
second-division salaries
It is not clear if the
current leadership
of AIB has very
much more
confidence in their
own bank. . .the
average holding
of the Executive
Committee was
6,479 shares each.
the bank, they did not risk any more of their own money
by making further share purchases despite taking a
combined remuneration of €4.7million over the period.
It is not clear if the current leadership of AIB have
much more confidence in their own bank. According to
the 2019 Annual Report the average holding of the
Executive Committee was a derisory 6,479 shares
each, from a total ordinary shares in issue of
2,714,381,237.
Private financial institutions, government depart-
ments and regulatory authorities all require employees
who are academically trained; professionally qualified,
and have extensive experience and managerial skill in
their areas. Because of our small size, it is dicult to
attract international candidates to Ireland to meet that
demand, so demand must be met from the limited
number of candidates endogenous to the domestic
financial system.
Small Fish
The profile of a typical Irish bank Titan is someone who
gained experience in a large accountancy firm or,
sometimes, in a division of an international bank or the
Irish operations of a multinational, before rotating
through the senior management of the Irish financial
institutions or public bodies like NAMA or the NTMA.
What limited professional diversity exists, is heavily
weighted in favour of essential non-financial functions
like HR, IT and marketing.
The lack of diversity of experience leads to individual
opinions coalescing around a shared cognitive frame-
work. Too often, such ‘groupthink’ masquerades as
cohesion and common purpose but was described in
the Nyberg Report on the bank crisis as a “pervasive
pressure for consensus”. The warnings in the report of
a tendency to “herding” went unheeded and it was a
factor in the more recent mortgage tracker scandal.
Regulatory Capture
The shallow pool of qualified people from which both
the public and private sector can draw runs the sub-
stantial risk of regulatory capture. It does not carry any
connotations of personal impropriety on the part of
POLITICS
Jully2021 45
individual regulators but, instead, reveals an
institutional bias to favour the very organisa
-
tions they are empowered to oversee. In addition
to the excessive familiarity between institu-
tions, individuals, through no fault of their own,
are placed in a position where they are required
to make decisions of public policy that aect or
benefit private companies where they were
employed in the past, or where they have rea-
sonable prospects of working in the future.
Of heads of the three main financial industry’s
bodies – the Banking and Payments Federation
Ireland; Irish Association of Investment Manage-
ment; and the Institute of Bankers in Ireland
– one was Minister of State at the Department
of Finance; the second was Minister of State at
the Department of Finance and Public Expendi
-
ture with Special Responsibility for Financial
Services and Insurance; and the third was
Deputy Governor of the Central Bank of Ireland
and acting Chief Executive of the Financial
Regulator
Tunnel Vision
This restricted worldview has narrowed the
range of policy choices the government even
considers in managing the shares it owns in the
banks and the policies it pursues to regulate the
banking sector.
The state’s Shareholding and Financial Advi
-
sory Division (SFAD) pursues the policy of selling
o the state’s shares as quickly as possible for
as much as possible – except when it doesn’t.
This object has precluded the modest pro-
posal to hold onto shares as a strategic
investment that forms the foundation of a sov-
ereign wealth fund whose investment income
would pay for future pension obligations. The
banks’ languishing share prices have forced the
SFAD to postpone/cancel further share sales.
Instead of share disposals, there is a new
emphasis on a strategy that seeks to emphasise
generating ongoing returns where “income
return in dividends and return of any excess cap-
ital becomes very important”.
The consensus that the state should sell its
stake in the banks means that the business
interests of the banks are prioritised over com-
peting public and consumer interests.
Driven by the privatisation imperative, the
ongoing consolidation of the financial services
markets and diminishing competition in the
sector is beneficial as it strengthens the position
of the remaining banks. It is a smaller concern
that this consolidation comes at a real financial
cost to bank customers.
If the government has abandoned its own
goals of speedy privatisation, then options
open to consider include using AIB and PTSB as
community banks that advance social policies;
or even reconfiguring the lamentable structure
of the entire retail banking market by reversing
consolidation and breaking these banks into
component parts to finally introduce genuine
competition.
MIsconduct - A long history
The track record of all banks across decades has
proven the need for strict prudential and con-
duct regulation. We tried light-touch,
principles-based regulation before the banking
crisis. It would be an understatement
to say it didnt work.
Irish banks have established a pat
-
tern of every few years lurching from
crisis to collapse, from debacle to dis
-
aster; from failure to fiasco.
In 1985 the collapse of the AIB sub
-
sidiary, the Insurance Corporation of
Ireland, resulted in a taxpayer bailout
of IR£400million, or €1,039,670,000
adjusted for inflation and converted
into euro.
In 1991 Permanent TSB lost its CEO,
Edmund Farrell when it was revealed
that about IR£400,000 of members’ funds (at
the time PTSB was a mutual society) had been
improperly spent on the CEO’s house over the
period 1987 – 1991.
From 1986 to 1991 Irish banks organised and
ran at a corporate level an unlawful tax-evasion
scheme. In 2000 AIB paid a record €90million
tax settlement and Bank of Ireland €30.5million
for their parts in the bogus non-resident
accounts scam. The Oireachtas Committee 1999
report found that “the most senior executives in
the Bank of Ireland did seek to set an ethical
tone for the bank and unsuccessfully sought
Revenue Commissioners assistance to promote
an industry-wide Code of Practice¨.
At the same time he was denying the extent
of AIB’s tax liabilities for this institutional tax
evasion. The then-CEO, Gerry Scanlon, and
three other senior executives of AIB (Roy
Douglas, who went on to be CEO of Irish Perma-
nent, Diarmuid Moore and Patrick Dowling) were
using AIB Investment Management to operate
Faldor Limited as a vehicle for their personal
investments. In 2006 they appeared on the Rev-
enue’s list of tax defaulters and paid settlements
and penalties in relation to the activity of Faldor
Limited.
The Faldor four were also caught up in an inap-
propriate share-dealing and artificial-deals
scandal which presaged the more recent Davy
improper-dealing scandal, though Faldor
screwed over AIB Investment Managers instead
of the clients.
In 2004 The Central Bank report found that
AIB had overcharged customers €34million in
foreign exchange fees and that senior managers
within the bank were aware that AIB was regu-
larly and consistently breaking the law over 8
years. The total cost of the debacle was
€65million.
Since 2008 Irish taxpayers have pumped
€64billion into the busted banking sector
although the net cost is calculated to have
shrunk to €42billion.
In 2009 Bank of Ireland paid a €2million pen
-
alty for providing the Department of Finance
misleading information about the true cost of
re-capitalisation and the level of bonuses paid
in the period following state intervention.
The ongoing tracker-mortgage scandal has
cost the five banks operating in Ireland €1.5bil-
lion in penalties and restitution costs while
costing some of the customers, who were
caught up, their homes.
Incestuous
Even when the banks have done nothing wrong,
the issue of regulatory capture persists and the
connections between individuals participating
in important policy decisions clouds the focus
on the public good and inhibits objectivity.
For example:
The current CEO of AIB, Colin Hunt, is seeking
permission of the Department of Finance, the
department in which he worked as Special Advi-
sor from 2006, to acquire Goodbody
Stockbrokers, for which he notably himself
worked as Head of Research and Senior
Director.
The Shareholder and Financial Advisory Divi
-
sion of the Department of Finance is responsible
for managing the state’s interest in AIB and three
of the five most senior ocials in the division
Groupthink masquerades as cohesion and
common purpose but was described in
the Nyberg Report on the bank crisis as a
‘pervasive pressure for consensus.
Turning gold to dross
46 July 2021
worked together at Davy Stockbrokers where they were
Director of Corporate Finance; Head of Research; and
Associate Director of Corporate Finance respectively.
They followed one another to new jobs at the NTMA,
from where they are currently on secondment to the
Department of Finance shareholder and financial advi-
sory division.
The former CEO of the NTMA, Brendan McDonagh, is
now Deputy Chair of AIB and, in his capacity of interim
chair of the bank, is Hunt’s boss.
While all the parties involved exercise their best
judgement in order to arrive at an optimum decision
in the public interest, their shared worldview limits
their ability to evaluate broader considerations.
Overpaid
Senior managers, executives, and directors of the
organisations that occupy the commanding heights of
Irish finance are among the best paid people in the
country. These exorbitant pay packages are usually
justified on a number of grounds, none of which stands
up to close scrutiny.
Clearly they are not being paid for results
delivered.
Although executives make important decisions that
determine the future of their organisations, it is dicult
to say that they are responsible for those decisions. The
Nyberg Report emphasised that bankers had diculty
accepting their appropriate share of the blame for
something in which so many others were involved.
Certainly there are precious few examples of finan
-
cial disincentives for poor decision-making. Mistakes
are often discovered only after generous remuneration
packages have already been paid and they, together
with accrued pension rights, are not recoverable if
those decisions prove to be disastrous.
International Comparisons
Irish bankers are not as lavishly paid as their interna-
tional peers, but then again, the Irish banking system
has been reduced to essentially two and a half poorly
run regional lenders. To paraphrase Aaron Sorkin – if
these guys were able to run big international banks,
they’d be running big international banks.
It is dicult to avoid the conclusion that Irish bank
-
ers are overpaid. The concept of rent-taking in economic
theory is the best way to understand this subject. The
most vivid illustration of the phenomenon is football
player transfers.
Genuinely talented players, such as Neymar or Ron
-
aldo, command astronomical fees and salaries
because their exceptional abilities are critical to the
success of the club. However, the eect of rent-taking
arises from the small pool of suitable players so that
clubs end up spending tens ofmillions of pounds on
transfer fees and hundreds of thousands of pounds per
week on wages on obscure and unproven South Ameri-
can teenagers. For sure there is plenty of promise and
excitement when the deal is announced, but often the
youngster spends the season watching from the bench
as the club gets relegated.
Rent-taking
Rent-taking represents the ‘excess’ returns aorded by
inecient markets that depart from idealised situation
of competitive markets.The economists Epstein and
Montecino have applied the concept of rent-taking to
“the case of bankers, [where] the rent is the amount of
their income that they are able to command over and
above what would be required to get them to perform
their activities”.
In an Irish context the market from which to pull is
very small and thus those individuals (or more accu-
rately the professional qualifications and experience
that make them eligible for consideration) are a limited
resource.
In the circumstances of such limited resources, the
market becomes inecient and circumstances are cre
-
ated that permit rent-taking (i.e. scalping) by these
individuals.
Executives have been able to leverage their profes
-
sional relationships to monetise their position within a
small, closed network and repeat generous rents. Such
is the small size of the Irish market that participants
have extensive contacts with, and detailed knowledge
of, each other and, in many cases, have worked along
-
side each other at one stage of their career.
It must be acknowledged that there are methodologi-
cal diculties in quantifying the amount of rent-taking
currently taking place. Executive pay consists of a mix
of earned income – ie the appropriate return on invested
eort in an ecient market – and how much is rent-tak-
ing – capture of excess profit due to market
ineciencies. However, the inability to put an exact
figure on current rent-taking does not cast doubt on its
existence. Much like Justice Porter, (in a legal case
about the definition of pornography), we know it is
taking place because ¨I know it when I see it”.
Fourth and second divisions
Ireland’s bankers are in the fourth division, and always
have been. They can count themselves lucky to com-
mand second-division salaries.
If these guys were
able to run big
international banks,
they’d be running
big international
banks.
BOI shre price lst 5 yers
AIB Shre price lst 5 yers
