Inflated bonuses rushed through as bailout loomed

Tue, Dec 14, 2010, 00:00

Knowing the bank was insolvent and State aid was forthcoming, AIB executives rushed through awards and unilaterally created binding contracts, writes FINTAN O'TOOLE

UNTIL LAST night’s volte face, Allied Irish Banks was to give €40 million of public money to 2,400 members of staff this Friday. These payments are so-called “bonuses” for exceptional efforts in 2008 – the year the bank became effectively insolvent as a result of its reckless lending. While the payments have generated disbelief and outrage, and a belated response from the Government, a highly significant point has been missed.

This is not a case of AIB being stuck with an embarrassing legal necessity. Instead, AIB itself created an apparent obligation to dole out the money to senior staff. It did so in the knowledge that the bank was insolvent and would soon be effectively taken into public ownership. The key question is not whether AIB is legally obliged to pay the money. It is whether it was lawful for AIB to decide to do so in the first place.

Mesmerised as we are by billions, we can be grateful to AIB for one small thing – reminding us of the value of a million. The €40 million of public money that was to be paid as bonuses to AIB staff is the equivalent of the entire budget cuts in the departments of defence and environment. It is almost the same as the savings made by cutting grants to all schools, literacy programmes and Youthreach, plus all the savings made by cutting the third-level student grant.

I have been in touch with one of those due to receive a bonus from AIB. He described the story to me as “a looting of the bank by management before the Government became involved in the institution”.

The official line from both AIB and the Government was that the bonus payments are simply a piece of normal bank business that is being resolved awkwardly late. The sequence of events, as I understand it, suggests something else. On the contrary, what we’re dealing with is a decision to pay inflated bonuses in the knowledge that the bank was on the skids and that this might be a last big pay-day. This decision was implemented just two weeks before the Government announced a €3.5 billion rescue package for AIB.

The bonus scheme was put into practice in a very particular period. On December 21st, 2008, Brian Lenihan announced that there would be a public recapitalisation of AIB. But the recapitalisation didn’t actually happen until February 11th, 2009. AIB’s senior executives thus knew that the bank was about to be taken effectively into public ownership, but it was still in theory a private institution. They were in what were described as “intensive discussions” with the Government and knew that they had only a short time before the recapitalisation was complete.

The usual procedure for bonuses in AIB was that staff would be informed in late March of the bonus due for the previous year. The payment would then be made in late April, along with the usual monthly salary.

Thus, the question of bonuses for 2008 should have arisen in March 2009 – after the bank was effectively taken into public ownership. At that point, of course, the Government would have been in a position to veto the payments. (According to AIB yesterday, some bonuses were normally announced in late February to be paid in late March. This would still have meant that the announcement of bonuses would have happened after the Government bailout.)

This is not what happened.

Instead, the relevant staff were individually called to unexpected meetings with senior managers on January 29th, 2009 – two months before they would normally have been informed of their bonuses. They were told that the bonus for 2008 was being brought forward and would be paid out on February 25th – two months before the normal date. The staff were explicitly told that the meeting they were then having constituted a verbal contract which was legally binding. In other words, senior managers at the bank created a legal obligation to pay the bonuses in AIB as it was effectively being nationalised. Staff were told to keep all of this to themselves.

Not only were the bonuses brought forward, however, they were also unexpectedly large. According to my source: “It was the general view of staff that this was the largest bonus that had been paid in any year by the bank, much to the surprise of employees. However, it was also the [well-informed] belief that this would be the last bonus paid for some time, hence the overcompensation.”

There was a feeling among AIB staff that it was unfair that Anglo Irish Bank staff had been paid bonuses in December 2008 just before the bank was nationalised. It was felt that AIB staff would miss out on the bonus given the intensifying furore.

“While there was surprise that a bonus was to be paid, and then the amount of the bonus, the timing of the announcement was also wholly unexpected. It was brought forward two months from the traditional awarding of the bonus, and the hurried nature was evident by the lack of a letter detailing the award and the sudden meetings. It became clear that the reason for bringing the timing forward so dramatically was the imminent involvement of the Government in the running of the bank and that no bonus payments would be possible once this happened.”

In the event, and in spite of the warnings to keep things quiet, The Irish Times got wind of the bonuses. At first, AIB confirmed its intention to pay them, then it said they were being deferred. In the legal case that followed, AIB did not put up a defence. Such a defence would in all probability have revealed what actually happened – that the bonuses had been brought forward to make them a fait accompli before the Government recapitalisation.

Three things need to be stressed. Firstly, there was no existing legal obligation on AIB to pay these bonuses at that time – the “contract” was deliberately created (verbally) by the bank itself in the meetings with staff. (Most of the staff in question had no bonuses specified in their written contracts. It was, as my source puts it, “more the expectation and unwritten rule that staff would be paid bonuses”.)

Secondly, the bonuses appear to have been inflated as “compensation” for the probability that they would be the last to be paid.

Thirdly, AIB’s senior management must have known at the time that the bank was effectively insolvent. They certainly knew that AIB was on the brink of an effective State takeover.

While there is no allegation of unlawful conduct by any AIB executive, the general conduct of this whole affair certainly warrants legal investigation. Such an investigation would seek to establish the legality of an insolvent company voluntarily making contracts to pay large sums of money to members of staff, while seeking to ensure that these liabilities would be entered into before a pending change of ownership could be completed.

This affair has not become irrelevant just because the bonuses have been withdrawn.

Timeline: How bank's bonuses beat bailout

DECEMBER 21st, 2008

Government announces that it intends to recapitalise AIB and to take partial control of the bank’s board.

JANUARY 29th, 2009

Senior AIB staff are unexpectedly summoned to meetings and told that their bonuses for 2008, due in April, are being brought forward. Staff are told that this information constitutes a verbal contract.

JANUARY 31st, 2009

A report in The Irish Times by John Collins reveals that AIB staff in the bank’s Capital Markets Division have been told of their bonus payments. However, following a query from Collins, AIB then announced that the payments were being deferred.

FEBRUARY 11th, 2009

Government announces that it has agreed terms for its €3.5 billion recapitalisation of AIB

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