AIB’s state of absolute disarray is no surprise

THE need for a continuation of the Government bank guarantee was highlighted this week by the country’s top bank – AIB.

It was made by chief executive Colm Doherty as he announced losses of €2 billion for the first six months of this year, the bank’s worst recorded loss.

Doherty’s day got off to a bad start when the interviewer on Morning Ireland accused him of having played a major role in contributing to those losses, and to the mess in which the bank is floundering.

Doherty deftly dismissed the claim, bringing the interview on the results to a rapid close.

In fact, the top executive tier in the bank was always a bit cavalier. It has a history of bad investments starting with ICI, where the winding-up process since the collapse of the general insurance company in the mid-1980s is still going on.

It turned out to be such an unmitigated disaster that the state had to take it over.

Failure to do so would have prevented the country from going to work the following week because it accounted for a huge part of employee insurance cover in the workplace.

At the time AIB was happy to take a nominal figure to transact the deal and to let the taxpayer bail it out at the time.

To the best of my knowledge the state-backed company set up to handle that particular disaster is still active and filing annual reports, 35 years later.

The point is that AIB’s state of absolute disarray should not surprise.

Before the latest debacle, exacerbated by the global credit crunch, the group suffered a near €700 million loss at its then US subsidiary, now part of M&T in which the bank has a minority stake. That has to be sold off, along with its Polish operations and British branch banking network, in a drive to raise some of the €7.4 billion hole left in its balance sheet due to the massive losses incurred mainly by its rich property developer cronies.

A few years before the bubble burst one of the group’s senior economists went on RTÉ and warned the biggest threat to the economy was the funding of the property boom by the banks.

That observation was not well received at the upper levels in the bank, but the current chief executive was part of the executive team at the time and though not directly involved in fuelling the bubble, he has to share in the blame given he has been a board member of the group since 2003.

The very least they can do is to put their hands up and say “yes we were wrong”.

Where we go from here is the overriding concern.

Doherty was none too reassuring about the future of the economy. Double dip recession cannot be ruled out and the threat of banking contagion has not gone away, hence the need to keep the bank guarantees for another 12 months.

It would be helpful too, he said, if the Government came out and signalled its commitment to the bank guarantee for another year.

The clear inference here is that Doherty fears the pressure on bank funding in Europe has not gone away and the threat of penal interest rates still hang over Ireland.

When the banking crisis erupted, Europe survived the initial onslaught But the unfolding events and fears about defaults by Greece or Italy on their foreign debt have ensured a deep sense of unease about the EU’s ability to withstand such a threat. While Europe has the banking and economic systems in place it does not have the political clout to pull errant states into line.

Doherty’s fear is that a new funding crisis will hit if Greece or Italy default, causing the cost of borrowing in weaker countries like Ireland to spiral. In that sense the need for the guarantee is as vital now as was when first introduced.

His message is that there is much more at stake than just the banks.