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Archive for December 14th, 2010

Since the Guardian drew attention to the story last week, the nation has been gripped by the apparent brazenness of Allied Irish Banks (AIB) scheduling the payment of €40m in bonuses this week. Having followed the story casually for a few days and since the operation of NAMA is at a quiet phase just now where developer business plans are being hammered out that will lead to fireworks in the very near future with disposals/demolitions/developments/foreclosures, I have dug a little and must say that I am unclear with the position of the AIB bonuses. Having studied the background some questions suggest themselves:

(1) Have John Foy and the other 90 employees that took legal action over deferred bonuses from 2008 at AIB already been paid their deferred bonuses (estimated at €10m) or is that part of the €40m what was scheduled to be paid on Thursday? John Foy won his uncontested case at the High Court on 3rd November, 2010. Wouldn’t he have been paid already? Have the other 90 been paid? Have others that didn’t take legal action but were engaged on the same contracts with the same bonus provisions been paid?
(2) The Minister says that 2,869 AIB employees were paid €58.65 million in deferred bonuses this year and last year. Who were these employees? Were these the only bonuses paid? Does this €58.65 million include the estimated €10m over which John Foy and the other 90 staff who took legal action?
(3) What is the wording of AIB’s contracts? The bonuses are variously described as discretionary and contractual. Wouldn’t a contractual bonus be more properly  called “commission”? Shouldn’t the wording of the contracts provide for “supervening events” (to use the language in the Minister’s letter yesterday) like the group becoming insolvent as a reason for abandoning the payment of bonuses?
(4) How much expense has AIB incurred with defending the legal action by the 90 employees this year. The expense will comprise the legal fees of both AIB and those of the employees as the High Court has seemingly ordered AIB to pay all costs. In addition AIB was ordered to pay interest at 8% per annum on John Foy’s unpaid bonus and that presumably applies to the other deferred bonuses also. That would bring John Foy’s payment up from €160,000 to €188,000.
(5) The statement from AIB yesterday suggests gratitude that the Minister has now intervened. What were the three public interest directors on the AIB board doing up to now? How is it that last week the Minister was powerless to stop the €40m in bonuses being paid and the proposed 90% supertax on bank bonuses would only apply to future bonuses. Yet today he seemingly has the power? The AIB statement says “however the letter from the Minister conveys a decision by him to legislate which overtakes this obligation.” Retrospective legislating away personal rights? This is just downright confusing.

So you thought Minister for Finance, Brian Lenihan’s letter to the board of AIB yesterday has put a stop to a €40m bonus payout scheduled for Thursday this week and that no bonuses will be paid to staff in the bank which is only capable of opening its doors this morning as a result of a soft-terms investment of the nation’s pension reserve fund and a commitment to future “investment” of €9.765bn? This entry examines bonuses paid by AIB since the introduction of the State guarantee in September 2008.

First of all, a timeline of the State’s provision of assistance to AIB
September 2008 – Guarantee on the liabilities of six Irish financial institutions (including AIB). The guarantee was given effect with the CREDIT INSTITUTIONS (FINANCIAL SUPPORT) ACT 2008 though it was a subsequent Statutory Instrument (SI 411 of 2008) that started to get to grips with bonuses for “directors and executives” as it required the submission of remuneration plans and presaged the establishment of Covered Institution Remuneration Oversight Committee (CIROC).

December 2008 – Department of Finance installs two public interest directors on the board of AIB – Dick Spring and Declan Collier.

February 2009 – CIROC publishes its report which addresses the remuneration (including bonuses) of “directors and senior executives”. Last week, Minister for Finance, Brian Lenihan told the Dail “as the House will be aware, the legislation introduced on foot of the bank guarantee specifically prohibits the payment of any performance bonuses to senior bank executives.”  I must say that apart from the CIROC recommendations that really seem to be confined to board members, I cannot see an explicit banning of performance bonuses. Perhaps there is some Statutory Instrument with a relevant provision but I have not been able to locate it.

9th March, 2009 – enactment of the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009 which allowed the State to direct the NPRF to invest its funds into banks as required by the Minister for Finance.

12th May, 2009 – Minister for Finance, Brian Lenihan, directed the National Pension Reserve Fund to invest €3.5bn in 8% yielding preference shares in AIB. In May 2010, AIB gave 198,089,847 ordinary shares to the NPRF in lieu of a cash dividend, which equates to about 18.6% of AIB’s ordinary capital. In simple terms today, the State owns 18.6% of AIB plus has 3.5bn of preference shares. The recent PLAR plan issued by the Financial Regulator anticipates the State investing a further €9.765bn in the bank.

November 2009 – Department of Finance installs an additional public interest director, Dr Michael Somers, formerly of the NTMA. That brought to three, the number of public interest directors on the AIB. So you would have thought that AIB was more than capable itself of dealing with this matter or making representations to the Minister for legislative changes.

December 2010 – Financial Regulator releases report on remuneration practice and policies in Irish banks and concludes in damning terms that banks are failing to put in place practices to mitigate financial and market risks.

Next a timeline of bonus payments by AIB
2008 – Bonuses for non-board members are not separated out in the annual report. They will presumably be an inclusion in Personnel expenses (under Note 9 to the accounts administrative expenses).

2009 – According to AIB’s annual report “no bonuses were paid in AIB generally in 2009 in respect of 2008 performance. Bonuses were paid to staff in our Polish subsidiary BZWBK (which was not covered by the Irish Government’s Deposit Guarantee Scheme) and in AIB’s Channel Islands based business. Some bonus schemes were also triggered in the Capital Markets Division in respect of 2008 performance.These bonuses have not been paid in the Republic of Ireland but were paid to staff located outside of Ireland on foot of threatened or initiated legal challenges. On the basis of legal advice, we have made an accrual against the future payment of outstanding, deferred 2008 bonus amounts, the timing of which will be subject to the approval of the Board and the Department of Finance in the Republic of Ireland. Bonus schemes in relation to the Group Executive Committee, executives and managers across Group Supports, Operations & Technology,AIB Bank ROI and AIB Group (UK) plc were not renewed for the 2009 performance year. No bonuses will be paid in these areas or in Capital Markets in respect of 2009, however, a provision has been set aside in the 2009 financial statements to meet any legal obligations arising.”

2010 – The Irish Times reports that Minister for Finance, Brian Lenihan “said in a response to a parliamentary question that some 2,869 AIB employees were paid €58.65 million in deferred bonuses this year and last year. Some €35.5 million was paid this year following legal action and a further €3.7 million was paid to staff in AIB Capital Markets in respect of deferred bonuses relating to work in 2006 and 2007. Some 62 executives shared €11.11 million, or an average of €179,000 each, for 2009, while 674 managers shared €30 million or an average of €44,000 each.”

Next a timeline of John Foy’s legal action
Who is John Foy? According to the Irish Times, he is “an AIB foreign exchange options trader” resident at “Newhaggard Lane, Trim, Co Meath” who joined AIB Capital Markets in 2005 on a basic salary then of €75,190 (his present salary does not appear to have been published). His Capital Markets division in AIB has been very profitable indeed with reported profits of “€585 million in 2008, €531 million in 2009 and €134 million in the first half of this year” and indeed €532m in 2007 and €589m in 2006 (pg 40/282 2008 Annual Report). He is one of 90 staff that took legal action in 2010 over unpaid bonuses for 2008. He is the public face of the 90 because his case was a test case and the ruling (not yet published) at the High Court on 3rd November, 2010 paved the way for the payment of not just his bonus but the bonuses of another 89 staff. The Independent report that “it is understood that Mr Foy no longer works for AIB. He first joined the bank in 2005, having graduated from UCD in 1995 with a commerce degree and a masters in business”

January 2009, John Foy’s line manager at AIB, Michael Cronin, writes to him to advise that he will receive a reported €160,000 as bonus for 2008 in the February 2009 payroll. He was later told payment was being deferred until further notice and then that payment was being deferred indefinitely.

April 2009 John Foy is reported to have claimed that the then head of AIB Capital Markets, Colm Doherty told staff that 2008 bonuses would be paid. Colm of course was subsequently promoted to be managing director of AIB. The hapless Colm was then “stepped down” in September 2010 being reportedly stunned at the revised and much increased capital requirements for that bank.

13th July, 2010 – application to the High Court (2010 3281 S) by John Foy – it is reported that 24 other staff issued proceedings in the High Court (which has a minimum value claim threshold of €38,000) and additionally, up to 65 staff issued proceedings in the Circuit Court. The Irish Times report that the aggregate value of the bonuses claimed in the courts to be less than €10m (average of less than €111,000). It is understood that John Foy himself was seeking €161,000 (sometimes reported as €160,000) . Law firm Byrne Wallace represented AIB. McDowell Purcell represented the 90 employees.

3rd November, 2010 – the Master of the High Court, Edmund Honohan, enters a judgment in favour of John Foy as AIB did not contest the application. In addition to the claim for the bonus, John Foy is awarded interest of 8% per annum (which will apply for nearly two years) and his legal costs.

Has John Foy already been paid the bonus and interest and legal costs? Media reporting (for example here where it is stated with my emphasis “Mr Foy will still get his” and here “Mr Foy will be paid his bonus in spite of the intervention last night by Mr Lenihan”) suggests he hasn’t yet been paid the bonus and that the €40m that was penciled in for payment as bonuses on Thursday this week includes John’s €160,000 which might then mean that €10m of the €40m was in respect of the 90 staff that launched legal actions and whose position was upheld following John Foy’s test case.

I must say I have mixed feelings about the bonus. I think John Foy was correct in arguing that it wasn’t the Capital Markets division of AIB that contributed to the bank’s downfall – it was reckless property-based lending. And from what I can see John Foy did his job well and earned a lot of real money for his employer. A lot of others who were more responsible for the crisis still command colossal salaries (having given up another €14,000, the Taoiseach is still paid €214,000, Secretary General at the Department of Finance, Kevin Cardiff still gets paid €228,466, former INBS chief executive Michael Fingleton received a bonus of €1m for his performance in 2008 and former Financial Regulator Pat Neary was famously paid a €630,000 not-so-secret golden handshake after his ruinous tenure at the helm). So from his personal point of view I can see why John Foy would feel justified in pursuing his bonus – by all accounts he earned it and he wasn’t responsible for the mess at the bank. Of course the position of the majority is that AIB wouldn’t exist today without massive State support on soft terms and against a background of austerity measures that see the weakest and lowest-paid in society having to contribute to bailing out the banks (including AIB), it is scandalous that those same banks pay an individual bonus that is now some 10x the minimum wage (following its 12% reduction to €7.65 an hour last week for new employees). So the position here would be to have sympathy for the man himself but in the context of his employer’s position and the sacrifices by society in general to sustain AIB, paying such a bonus would be unjustified (though it may well be the case that it has in fact been already paid).

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NAMA must be glad that its operation has captured Derek Quinlan’s UK lending. Whilst the sale on Quinlan’s South Audley Street car park might have temporarily stalled, it seems that there are plenty of bidders for the property and that NAMA will see a tidy profit in 2011 from the sale of the Mayfair carpark with planning permission to develop luxury apartments. A few kilometres east of Mayfair lies the Docklands area which was regenerated in the 1980s and 1990s and today hosts many of world’s top financial companies. Quinlan along with veteran property investor Glenn Maud acquired 25 Canada Square in 2007 for GBP 1bn and it is expected to be placed on the market in the New Year with a price tag that would see a substantial part if not all of Derek Quinlan’s borrowings on the property repaid to NAMA. The building is presently the subject of a 26-year lease to Citigroup which expires in 2026.

Today sees the publication of the UK November 2010 IPD Monthly Property Index – the index covering UK commercial property up to the end of November 2010. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values are increasing but at a vastly reduced rate than earlier in the year. The Index rose by 0.1% in November 2010 compared with October 2010. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 9.8%. Commercial prices in the UK are now 35.3% off their peak in June 2007. On an annual basis prices are up by 9.8%. The NWL index is now at 912 which means that NAMA needs to see a blended increase of 9.7% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The EU stress test of selected banks published in July 2010 had a benchmark scenario of 0% growth in 2010 in UK commercial prices. Year to date, we are up 6.6% (the data at the top of this page is from Nov 2009 – NAMA’s Valuation Date – not Jan 2010) which would imply that December 2010 will see a drop of 6.6% which is highly unlikely – it now seems that the stress tests that gave AIB and Bank of Ireland clean bills of health were not so accurate.

Given that NAMA has valued the loans it is acquiring at 30th November, 2009 it would seem to make sense if it disposed of UK property first given the pressure the agency is under to generate cashflow and some sales – it hardly makes sense to sell off Irish property which has dropped by 10% since last November unless the assessment is that it might continue to fall and not recover for a considerable period, possibly beyond NAMA’s life expectancy (or that a future recovery in UK property would exceed any falls in Irish property).

The first table below shows the month-on-month % change in commercial property capital values since 30th November, 2009. The IPD index is broken down into three components – retail, office and commercial.  The second table shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner. Overall it shows that commercial property in the UK is worth 9.8% more at the end of November 2010 compared with the end of November 2009.

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