TO STEP aside is better than to be pushed aside. The three AIB directors who resigned this week have, wisely – if narrowly – avoided the latter fate. For once institutional investors indicated they had lost confidence in top management at the bank, chief executive Eugene Sheehy, chairman Dermot Gleeson and finance director John O’Donnell had little choice but to fall on their respective swords.
Their resignations were always inevitable and long overdue. Increasingly, these key personnel had become part of the AIB problem: tangible liabilities rather than intangible assets on their bank’s badly impaired balance sheet. As such they were never going to be part of any credible solution to the bank’s growing financial difficulties.
Like the management at other banks in Ireland and overseas, AIB’s top executives have presided over the destruction of shareholder wealth on a massive scale. In less than two years AIB’s share price has fallen by more than 90 per cent from its peak. Virtually overnight, many equity investors have seen their life savings wiped out, whether as shareholders in this financial institution or in others where a similar collapse in share values has occurred: Anglo Irish Bank, Bank of Ireland and Irish Life and Permanent.
Once again the taxpayer has become the involuntary lender of last resort, forced to guarantee the liabilities of the Irish banking sector (€440 billion), to recapitalise the banks (€7 billion and rising) and to buy their bad debts (up to €90 billion). And all this to bolster the banks’ balance sheets and to ensure they start lending again.
Taxpayers have had to pay a huge price for the reckless financial folly of bankers. At every stage of the economic downturn, senior AIB management got it wrong. From the outset, the bank greatly underestimated the impact of the credit crunch and over-estimated the adequacy of the bank’s capital to absorb defaults on loans made to property developers. Last October, Mr Sheehy stated defiantly that he “would die rather than raise equity”. But by February, AIB, then unable to raise equity via a rights issue from investors – given the collapse in its share price and market scepticism about the adequacy of its capital reserves – was forced to accept investment by the State.
The Government’s proposed €3.5 billion investment, however, has proved insufficient to absorb likely loan losses and last month AIB was forced to announce it would seek to raise a further €1.5 billion to bolster its reserves. The bank’s top management, having made a succession of poor judgment calls, had lost credibility. And on Thursday they made the right decision by resigning.
Over the past seven months, since the Government stepped in to rescue the banks, much of the top management in those financial institutions has been purged. That needed to happen and the purge has further to go. It is now time for the remaining survivors at Bank of Ireland, at Irish Life and Permanent and at EBS building society to reconsider their positions and to follow the example set at AIB this week.