Fraud And Conspiracy?

Allied Irish Bank has moved quickly to assure the markets and the wider community that it will survive the massive fraud uncovered…

Allied Irish Bank has moved quickly to assure the markets and the wider community that it will survive the massive fraud uncovered at Allfirst, its US subsidiary. There is, indeed, no immediate threat to the future of the bank, but its management now faces an enormous task in rebuilding confidence in the wake of yesterday's extraordinary revelations.

Yesterday AIB shares fell by around 17 per cent, wiping €2 billion off the value of the bank. If the damage were limited to this, then AIB could be considered to have escaped relatively lightly.

The short-term danger is that in the current post-Enron climate the markets will believe that the reported problems are symptomatic of a deeper malaise. The flight from risk that has characterised the markets since the collapse of the giant US energy company has already hit another Irish company, the pharmaceutical group Elan.

The recent travails of Elan and the spectre of Nick Leeson's destruction of Barings Bank must have preyed on the minds of AIB's executives as they prepared to unveil their bad news yesterday. Elan's problems are partly of its own making, while AIB is the victim of a fraud and possibly a conspiracy.

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The bank's board members will want to know when they meet this morning how it was possible for such a massive fraud to occur in a supposedly well-run organisation. The markets will also soon start demanding a fuller explanation that the one offered so far. Amongst the more alarming revelations yesterday was that the losses related to events going back for over 12 months, but only came to the attention of the bank in mid-January. The chief executive, Mr Michael Buckley, was not aware of the problem until Monday night.

The bank's explanation appears to be that if someone you trust sets out to steal from you there is not much you can do about it. They will have to come up with something better if they want to reassure investors that AIB's management can plot a course out of the current crisis. The days when one trader could rack up losses of hundred of millions were supposed to have passed with the collapse of Barings Bank.

Regardless of the explanations, there will be serious repercussions for the bank. Several options are being mooted, the most dramatic being an opportunistic takeover move by another European bank. At a minimum the bank will now have to curtail its expansion plans. Also, the reputation of the Irish stock market has been severely hit by the AIB affair, particularly as it followed so closely on the Elan share collapse.

The task now facing Mr Buckley is a difficult one. He has been in the job for just over six months; how he handles this challenge will either make or break his tenure at the top of the bank. He has been quick to reassure investors. And there is no question of any State support, as happened when ICI collapsed in the 1980s. It would now be encouraging to see similar public assurances given to customers that they will not ultimately have to foot the bill for management failure .