Kallakis trial sheds light on workings of AIB during 2008 crisis

BUSINESS OPINION:Announcing that it had a massive problem with a €1 billion UK property portfolio in late 2008 would not have been a good move, writes JOHN McMANUS

LATE IN 2008, in the midst of the credit crisis, AIB did a property deal that, notwithstanding the times that were in it, struck many as odd.

The bank seized the property portfolio of a UK client, repackaged it and sold it on to Green Property on extremely favourable terms. The £740 million (€930 million) portfolio of 16 properties had been assembled by Achilleas Kallakis, a Greek businessman who had borrowed the money from AIB partly on the back of guarantees from a Hong Kong property company.

The guarantees and much else of what Kallakis told the bank tuned out to be untrue and he is currently on trial in London for fraud. The case is being taken by the UK Serious Fraud Office, but AIB employees past and present are key witnesses, including former non-executive chairman Dermot Gleeson, who took the stand last week.

His answers – and those of other AIB staff – shed light on the Green deal and on what was going on in the bank at time – something the bank has been understandably reluctant to talk about publicly despite having subsequently collapsed into the arms of the taxpayer at a cost of €18.4 billion.

The terms of the Green deal were, to put it mildly, highly unusual. The bank moved to take control of the properties when Kallakis turned out to be not all that he seemed. Instead of appointing a receiver or putting the properties on the open market, the bank sold them on to Green without even carrying out a fresh valuation. They were sold for £667 million, leaving AIB nursing a loss of £73 million, or €100 million, on its loans.

In addition, the bank lent Kish – the Green acquisition vehicle – 100 per cent of the purchase price at preferential rates plus another €100 million to cover costs and interest.

From Green’s perspective the deal must have been a no-brainer, because whatever else Kallakis might have been he was no dummy when it came to property and had assembled a decent portfolio.

The only condition seems to have been that Green had to give AIB 35 per cent of any future profit, but it was presumably free to extract whatever management fees and so on it chose. It may not be the deal of the century, but it comes close.

According to Gleeson’s evidence it seems to have been waved through by the bank’s top management in 24 hours. He told Southwark crown court last week that the deal was already in motion when it came before his “chairman’s committee” of five directors, which dealt with issues that arose between board meetings. The terms were “unusually favourable, but the situation the bank was dealing with was very awkward and difficult”, Gleeson explained.

Its not clear if Gleeson was referring only to the Kallakis situation or to the wider crisis that was gripping the bank.

It is important to remember that the Kallakis issue surfaced in mid-2008 and the bank moved against him in September of that year, just as the credit markets were freezing up and the Irish banks were being shut out. In a matter of weeks the whole world seemed to have woken up to the fact that Ireland’s finances were a mess and its banks’ balance sheets were riddled with rotten property loans. What was not clear, but soon became apparent, was that the government was woefully unprepared and out of its depth.

AIB, like every other bank, was trying to put the best possible gloss on its situation – both to the markets, but also to the regulator and the government. Announcing that it had a massive problem with a €1 billion UK property portfolio in late 2008 would not have been a good move.

The evidence of another AIB employee is particularly enlightening. Donal O’Shea, the second in command of the bank’s UK commercial lending operation in 2008, cut to the heart of the matter when he told the court that “if we had gone straight to the market we would have taken far bigger losses ”.

Instead, the bank quickly put together the deal with Green, which it should be remembered was subsequently queried by the Central Bank.

O’Shea’s comments seem to point towards a bank that either was desperately trying to cover up its problems in late 2008 or had not really faced up to the extent of them.

Either way it seems reasonable to presume that neither the government nor the regulator had the full picture regarding the Kallakis portfolio and by extension the scale of the problems at AIB. And given the extent to which the government was relying on the views of the banks themselves – and their accounts – in late 2008, you can understand a bit better how they walked themselves into the blanket guarantee.

The rest, as they say, is history.