Way paved for effective nationalisation of AIB

Journalists were excluded from High Court hearing, writes  SIMON CARSWELL

Journalists were excluded from High Court hearing, writes  SIMON CARSWELL

THE FIRST use of the Government’s new emergency banking legislation was a request to exclude this journalist and a colleague from the High Court.

The second was to ask the court for approval to pump a further €3.7 billion of taxpayers’ cash into Allied Irish Banks (AIB), overruling the rights of shareholders.

The court agreed to both requests, dismissing a plea from Irish Timesjournalist Mary Carolan for a brief adjournment to consider whether the newspaper could consult its lawyers to consider challenging the application being heard behind closed doors.

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The second use of the sweeping legislation will pave the way for AIB to be effectively nationalised, becoming the fourth of six Irish banks to fall under State control.

The first request means the public is at a loss to know the full reasons for and terms under which Minister for Finance Brian Lenihan is putting another €3.7 billion in, after €42.6 billion already committed to five of the six banks with further billions to come.

This is the power the new legislation, the Credit Institutions (Stabilisation) Act 2010, bestows on the Minister to hammer the banking sector back into shape. Section 60 of the Act gives the Minister the authority to bring the shutters down around any court order he seeks to save the banks.

“The court may order that any application under this Act, or any part of such an application, shall be heard otherwise than in public or may impose restrictions with regard to the disclosure in open court, publication or reporting of any material that might be commercially sensitive,” it says.

The Minister’s move was so rushed and surreptitious that his lawyers found themselves locked out of the Áras Uí Dhálaigh building at a snow-swept Four Courts when they arrived - with four large boxes of legal papers - for the impromptu 9am court hearing. The judge even had to enter the court through the public door as she could not access her private chambers.

David Barniville SC, for Mr Lenihan, told Mrs Justice Maureen Clark it was necessary to hear the application in private as it related to a financial institution and the matter was of “extreme commercial sensitivity”.

The public sitting of the court wasn’t even told the name of the bank. Taxpayers are being kept in the dark on aspects of the order.

Not knowing the terms on which the Minister is using vast sums of funds from the State’s rainy-day fund, the National Pension Reserve Fund (NPRF), to prop up what was once the country’s largest bank is the price to be paid for saving AIB from oblivion.

Remarkably, after this – the Government’s second of three (and possibly more) bailouts of the bank – shareholders will still be left with an investment in this failed bank. AIB is being delisted from the main Dublin and London stock exchanges but the shares will move to the junior Irish market.

Shareholder losses have already been severe. AIB’s market value has collapsed from almost €21 billion at its peak in February 2007 when it was flush with the spoils of the property boom to €432 million this week as it is overcome with the debts of the boom.

Investors are effectively being wiped out as the Government will eventually take a stake of 92.8 per cent. Initially, the State has taken a stake of 49.9 per cent so AIB can complete the sale of its most-prized asset, its Polish bank, to generate €2.5 billion that is going towards its €15 billion capital bill.

Even after yesterday’s €3.7 billion Government bailout and last year’s €3.5 billion State injection, AIB will require up to a further €6.1 billion by the end of February.

Next year’s injection will meet the “over-capitalisation” target set under the rescue agreed last month with the EU and International Monetary Fund (IMF).

Some of AIB’s €15 billion bill has come from the sale of its Polish and US interests, and more may come from forcing losses on to subordinated bondholders, whom the bank owes about €4 billion.

However, most of the capital will be drawn from the NPRF, which – along with the State’s cash reserves – is being raided for the Government’s €17.5 billion contribution to the EU-IMF aid package.

Two days after being fined €2 million by the Financial Regulator – the highest fine given to an Irish retail bank – for years of inadequate redress over customer overcharging, AIB faces the further ignominy of effective State ownership. The bank will join Anglo Irish Bank, EBS building society and Irish Nationwide Building Society in the arms of the State, ending its life as a 44-year-old company listed on the main Irish stock market after a slow, torturous death over this two-year crisis.

The genesis of AIB can be traced back to a conversation at a urinal between the chief executives of two smaller Irish banks. A suggested merger between the bankers at a function in Dublin led to the union of Munster Leinster Bank, Royal Bank of Ireland and the Provincial Bank of Ireland in 1966.

More recently, AIB has been beset by scandals – the failed investment in ICI which almost collapsed the bank in 1985, the evasion of hundreds of millions in tax by AIB and its customers in the Dirt scandal, the remarkable generosity shown to Charles Haughey over his debts of £1 million at the bank, and the $691 million losses of rogue trader John Rusnak.

Yesterday, AIB’s board of directors said the latest bailout was “critical for the continued activities of the company”. The latest €5.5 billion loss on loans sold at a 59 per cent discount to the National Asset Management Agency – crystallised this week – has pushed the bank to the edge.

Unlike the 1985 bailout of AIB following the ICI debacle, the State will take full control of AIB in return for saving it.

This follows several opportunities given to AIB by the Minister to clear a rising capital hurdle on its own. But, with the bank still needing to raise more than 20 times its market value to meet regulatory capital deadlines by the end of this month and the end of February, effective nationalisation was a foregone conclusion.