Litigation lifts the lid on boomtime practises in AIB

Ensuring that a tight lid is kept on the greed and folly of the banking sector is the only way to avert another crippling crisis, writes Kyran Fitzgerald.

There is nothing like a decent bit of litigation when it comes to gaining some useful insights into how the country’s banks were run at the height of the boom.

The Employment Appeals Tribunal has just published a very interesting determination. It concerns the dismissal of a branch manager, Declan Maher, following an internal investigation into his handling, in 2005, of an application for a $60m loan by a partnership-consortium in respect of a project in Florida.

The tribunal awarded Mr Maher €25,000 in damages for unfair dismissal. In its view, the manager was guilty of a breach of trust having involved himself in a conflict of interest situation.

The proper sanction, however, was demotion, not dismissal. Up until the time of his dismissal in 2011, Mr Maher was a bank manager in rural Ireland. As a bank manager, Mr Maher had discretion to grant loans of up to €160,000.

Yet on April 21, 2005, he sent out this letter to the partnership involved in the application. It goes as follows: “I refer to your recent application, on behalf of the Partnership Consortium, to borrow $60m. I can confirm in principle that we are agreeable in principle to advance these funds to your group subject to the following..”

According to the former manager of AIB’s special investigations unit, the claimant explained that his reason for writing the letter was that he was trying to get business for the bank from people who had business interests in Florida.

The investigator concluded that this was a “letter of sanction in principle” and that accordingly, Mr Maher had clearly breached the lending authority granted him by line management. This senior official accepted in his evidence that bank officials are allowed to have outside business interests “provided these interests do not interfere with bank business”. Critically, in this case, Mr Maher was a part-owner of the partnership to which the letter was addressed.

According to AIB’s head of credit sanctioning, the manager should have made the bank aware that he had a conflict of interest and should not have considered the loan application. The head of credit acknowledged that the bank did not have a template letter of loan sanction in place at the time to provide guidance to people handling such applications. Such a template is now in place.

Mr Maher defended his position robustly at the tribunal. He argued that the letter he sent was “merely an expression of interest in a business deal and as such, it did not require a decisioning process or approval. He did not exceed his authorised lending discretion as it was not an agreement to advance monies”. His view was that “if he could get his employer in on the deal, it would be good for his career”.

He considered the deal in Florida was “something that you never come across” and he was “hoping to get his employer into the ring. If he landed it, his supervisors would never ignore him again”.

He did ring the AIB branch in North America to tell them that a deal was being put together if they might be interested. Why would he do that if he was trying to hide anything, he insisted. Mr Maher added that AIB was “struggling hugely at the time, looking for product offers for its customers”. Managers were always being asked to try to find suitable investment opportunities or ventures that might be profitable, so what he was doing at this time was very much with the bank’s hat on.

One has to ask what an Irish country bank manager was doing getting involved in a mega deal in Florida? It was such activities which have contributed to the huge cost of the Irish bank bailout — in excess of €60bn at this point. The first hearings of the Oireachtas banking inquiry gets under way shortly. The chairman, Cork South Central TD, Ciarán Lynch, has a mighty job on his hands.

The inquiry must investigate the strange world of Irish banking in the Noughties when a lot of people got into activities way above their pay grade. Focus on harsh missives from European Central Bank chiefs should not distract us from focusing on the negligence and high handedness, in various parts of the Irish political and business establishment in the years leading up to the crisis.

In the US, the Federal Government is, at least, in a position to extract financial penalties from the banks. In the year to September last, it extracted almost €20bn in penalties for financial misconduct from institutions including Bank of America, Morgan Stanley, Citigroup, UBS, RBS, and JP Morgan Chase.

The EU, meanwhile, has concentrated on changes aimed at improving standards within banks operating across the Union.

The Court of Justice, at first instance, has just upheld a directive which puts a cap on the level of bonuses that can be awarded to bank employees. The ‘Capital Requirements Directive’ stipulates that employees cannot be paid bonuses in excess of 100% of final salary (with a higher cap of 200% subject to a shareholder vote in favour).

An EU regulation also provides that financial institutions must disclose the number of individuals being remunerated over a certain threshold as well as information on the total rewards paid to each senior manager.

The UK Government challenged the rules arguing that they fell within the realm of social policy and were matters to be determined by individual member states. The advocate general of the court, Mr Jaaskinen, upheld the need for measures aimed at promoting the stability of the financial system and ensuring that the efficient operation of the EU single market is maintained. His ruling is likely to be followed by the full court.

The British Government has brought at least three challenges to new EU regulations on banking, all of which have been thrown out by the Court of Justice. The UK Government continues to defend the interests of the City of London which is a major contributor to the UK economy. However, British banks have continued to be brought to book over dodgy practices. The ‘Libor’ scandal arising from the manipulation of interbank rates by a cartel of banks over a period going back to 1991, exploded into view as recently as June 2012.

Despite this, governments still press for a free wheeling approach to banks, on the one part, while posing as stern sheriffs on the other. People want to get close to the money. Ensuring that a lid is kept on the greed and the folly will remain a daunting challenge and no doubt, it is only a matter of time before the next big financial scandal emerges.