When the taxpayer rescued the AIB `big boys'
This morning a tale concerning AIB and two of its Key Business Influencers (KBIs), Garret FitzGerald and Charles Haughey.
Over the St Patrick's weekend in 1985 Garret FitzGerald, then Taoiseach, was ill at home in Palmerstown Road, Dublin. He was visited by two of his senior ministers and, as it happens, his two successors as leader of Fine Gael, Alan Dukes and John Bruton. These at the time were respectively minister for finance and minister for industry, trade, commerce and tourism.
They had news which had alarmed them and which alarmed the indisposed Taoiseach: that the major financial institution in the State, Allied Irish Banks (AIB), was in danger of collapse because of the emergence of a crisis in one of its subsidiaries, the Insurance Corporation of Ireland (ICI). The crisis had arisen from spectacular mismanagement in the London office of its operations. They agreed with a request by AIB that the State take over ICI, along with all its liabilities estimated at between £50 million and £120 million.
Of course, the value of ICI was by then nil, and the AIB investment in it of £86 million was now for nothing. But in 1983 the profits of AIB were £83 million, in 1984 they were £85.4 million, and the bank's projected profits for 1985 were in excess of £80 million. It is not at all clear, therefore, why AIB could not have absorbed the cost of the ICI debacle entirely, even if it would have needed some temporary support from the Central Bank to tide it over any damage to its credibility.
Alternatively, the State could have funded the cost of the rescue by acquiring a shareholding in AIB to the value of whatever the cost of the rescue turned out to be.
There were very good grounds for requiring AIB to fund the entire cost. John Bruton told the Dail on March 27th, 1985: "It is almost incomprehensible and more than a little disquieting that it apparently took so long for senior management in both ICI and AIB to begin to realise that there might be fundamental problems with the London branch operations of the insurance company, which, after all, accounted for about 70 per cent of the total business in gross terms".
In his autobiography, Garret FitzGerald wrote that he was determined that "none of the ultimate financial cost of this salvage operation should be borne by the taxpayer" (page 617) and he concluded triumphantly "the taxpayer was eventually protected from carrying any part of the burden". "Unhappily", he continued, "we never succeeded in convincing public opinion of this and, as a result, the myth has persisted ever since that the Exchequer (i.e. the taxpayer) carried the burden of bailing out AIB".
Unhappily, public opinion was right and Garret FitzGerald was wrong: the taxpayer was indeed saddled by the ICI salvage operation. AIB escaped relatively unharmed, and it seems that it was solicitude for the financial health of AIB that was uppermost in the mind of Garret's government at the time.
IN concluding his speech in the Dail on the Bill providing for the salvage of AIB, John Bruton said: "AIB remains a strong financial institution, despite the heavy losses, which they incurred in the ICI fiasco. The AIB board have announced that they will maintain their dividend despite the losses.
"While I personally regard this as a somewhat insensitive announcement, highlighting the bank's much greater concern for shareholders than for the policy-holders of ICI or the general public, I am advised that a cut in dividend would be taken in the stock markets here and abroad as a signal - in this case false - that the underlying strength of the AIB was somehow damaged." This was regarded as the "responsible" attitude at the time.
Tomas Mac Giolla was to remark later in that debate: "I find that when people are being responsible it means that they are standing by the big boys in some place or other".
Stand by the big boys they certainly did.
Patrick Honohan was economic adviser to Garret FitzGerald in 1985 and is now a research professor with the Economic and Social Research Institute (ESRI). Along with a colleague at ESRI, Jane Kelly, he had published in the autumn 1997 issue of Administration a paper on the ICI debacle and how it was resolved.
This showed that the cost of the ICI bail-out was £185 million in 1985 money terms. But this figure included the loss of the initial £86 million, which AIB paid to acquire ICI in the first place, a cost which, properly, should not be included in the bail-out figure.
Thus the total cost of the bail-out was £99 million in 1985 money terms. Of this, the accountancy firm, Ernst and Whinney, paid £32 million in settlement of a legal action taken against it by AIB arising from the debacle. Thus the parties that bore the salvage costs paid were left with £67 million. And of this AIB paid just £43 million net.
Other financial institutions were required to pay a net £6 million, which left the State paying £18 million. In other words the "big boys" of AIB got £18 million of our money, because of a cock-up they themselves made of a subsidiary.
In the very next budget that followed that catastrophe, the 1986 budget, deposit interest retention tax (DIRT) was introduced. And in the succeeding several years AIB, which had sought and received a massive bail-out by the State in 1985, cheated the State to the tune of £100 million (approximately). And the Revenue Commissioners let them away with it.
If that is not looking after the "big boys", what is?
Ungraciously, AIB went after Garret FitzGerald in 1994 when he owed them several thousand pounds following the collapse of GPA. Garret, unhappily, did not have the chutzpah of his political rival, Charlie Haughey, to tell AIB what to do with itself.
One's admiration of Charlie Haughey's chutzpah is enhanced by reading his contribution to that 1985 Dail debate concerning AIB. Just a few years previously he had led these "big boys" in AIB a merry dance and, in the process, run up an overdraft on them of £1.4 million.
He said on March 27th, 1985: "It would be an absurdity, an unacceptable injustice and totally ridiculous if the general public, the great majority of whom have never benefited one iota from banking profits and many of whom have had very unhappy experiences at the hands of bankers, were asked to step in and take up an additional burden because of someone else's mistakes, mistakes made in this very specially privileged sector of our economy."
If only for what he did and might have done to AIB (he would have done it had he been in power, wouldn't he?), he should be forgiven a lot.