The bank's worst-case scenarios became reality and made Sheehy's defence of its capital adequacy all the more bizarre, writes SIMON CARSWELL

THE WRITING was on the wall for Eugene Sheehy, the chief executive of Allied Irish Banks (AIB), when the bank announced 10 days ago that it would be raising a further €1.5 billion in capital.

It was yet another reversal by AIB in a long-running series of U-turns dating back to last autumn and another admission that the bank had not “fire-proofed” itself with enough capital to absorb possible extreme losses.

Sheehy said last October that AIB would “rather die than raise equity”, comfortable in his assumptions that the bank’s worst-case scenario on loan losses, outlined in July, would not become a reality.

It did. By November AIB was revising upwards its position on losses, writing off more on loans.

Professionally, this was fatal for Sheehy and made his histrionic defence of the bank’s capital adequacy all the more bizarre.

However, it took more than five months for Sheehy to admit that his mistakes merited the decision taken yesterday to step down.

Sheehy is departing with AIB chairman Dermot Gleeson and finance director John O’Donnell.

Sheehy was the last chief executives within the six Irish-owned guaranteed institutions to remain standing, excluding relative newcomer Fergus Murphy at EBS.

So AIB’s top three executives are gone – seven months after the Government guaranteed the bank’s deposits; two months after it agreed to recapitalise the bank with €3.5 billion; and more than a fortnight after the Government agreed to buy possibly up to €30 billion of the bank’s riskiest loans. Pressure had grown on Sheehy as each Government bank rescue measure was announced.

Continuously, the bank reiterated that Sheehy had the “full support” of the board of the bank.

At AIB’s 2008 results presentation in March, the bank again painted an even more pessimistic outlook for projected loan losses.

Presenting the figures, Sheehy and O’Donnell said that the bank could write off up to €8.4 billion over three years (from 2008 to 2010) and still have enough capital in reserve with the Government’s proposed €3.5 billion investment.

This new forecast again proved ill-timed, ill-fated and insufficient.

Carrying out due diligence ahead of the State’s recapitalisation, the Government stress-tested the bank to a new extreme – losses of up to €12 billion through the anticipated recessionary cycle.

The Government wasn’t happy with the results and after heated discussions with the bank over the third weekend of April, AIB agreed to raise €1.5 billion more, bringing the total capital infusion into the bank to €5 billion.

This made Sheehy’s position all the more untenable given that he has so consistently stated that AIB had enough capital to see it through the financial crisis.

Internally, staff had growing reservations about Sheehy’s low-key communications style and invisibility at the top during a time of such severe crisis and uncertainty.

Many were also unhappy at the ham-fisted way he had demanded a 5 per cent contribution from long-serving staff to help meet the shortfall in AIB’s defined benefit pension scheme, particularly given that he had previously played down the deficit’s significance.

Shareholders are still reeling from the 94 per cent collapse in AIB’s share price from its peak and the loss of €20 billion in value.

Accepting the Government’s demands that it raise additional capital, AIB has said it may have to sell assets.

It signalled this could include its 70 per cent stake in Polish subsidiary Bank Zachodni WBK; as recently as January, the bank denied that it would be sold.

Tensions emerged between the Government and AIB ahead of the bank’s recapitalisation last February, with opinions differing on the terms and capital required.

Pressure had been growing ever since then.

In response to initial private suggestions from Government that its preference was for a “bad bank” plan to cleanse toxic loans from the banks, AIB floated the idea of a hybrid scheme involving a risk insurance model chosen by the UK, where bank losses are written off over time – a less severe solution for a bank.

The Government’s decision to opt instead for the National Asset Management Agency put further pressure on Sheehy’s position.

The agency’s purchase of up to €30 billion in development and related loans from AIB could lead to the State taking as much as a 78 per cent stake in the bank.

Over the past week, the bank’s largest institutional shareholders had signalled either that they would abstain from the vote at this month’s annual meeting to re-elect Sheehy or had shown their ambivalence on whether he should remain. The Government also refused to divulge how it would use its 25 per cent voting rights.

At this stage, Sheehy’s position became untenable.

AIB profiles

Chief executive:

Eugene Sheehy

Eugene Sheehy (54) has worked at AIB for more than 35 years and was one of the first bankers to suffer a pay cut as the banking sector troubles emerged last year. Sheehy's remuneration package arrived at €1.15 million in 2008, down from €2.1 million the previous year.

Sheehy, who succeeded Michael Buckley as AIB chief executive in 2005, is originally from Dublin and was educated at the Salesian College in Limerick. He lives in Donnybrook and is married with two children.

He first joined AIB at 17, working in the branches. He became manager of AIBs branches in Capel Street, Dame Street and Phibsboro and rose up to become head of the banks retail operations in Ireland.

He was then dispatched by Buckley to AIBs US operations in 2002 to handle the fallout from the $691 million (€492 million) currency trading fraud committed by John Rusnak at AIBs Allfirst subsidiary in Baltimore, Maryland. Within six weeks, he was appointed executive chairman of Allfirst and oversaw the investigation into the fraud and the sale of the bank to MT Bank. He became head of MTs mid-Atlantic division. He was recalled to Ireland to take up the top post.

He had been the favoured internal candidate for the job, which some had expected would go to an outsider following severe criticism of AIBs corporate culture in the wake of overcharging scandals.

Sheehys 45 per cent pay cut last year was implemented as AIBs pretax profits dropped to €1 billion in 2008 from €2.5 billion the previous year after sharply increasing losses on loans made to the development sector.

Chairman:

Dermot Gleeson

Dermot Gleeson (61) is a barrister and former Government adviser who has held a number of senior positions in public and business life. For his services to AIB, Gleeson was paid fees of €475,000 in 2008.

Born in Cork, he was educated at Blackrock College in Dublin. He qualified as a barrister at the Kings Inns and was first called to the bar in 1970. He was appointed a senior counsel in 1979 when he was just 30.

He joined the board of AIB in 2000 and was appointed chairman in 2003.