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Bankers Living In Lala Land

Posted on: December 8th, 2008 3 Comments

Another week in wonderland for Ireland’s bankers. Terrible results from Anglo, but its boss David Drumm pronounced them a triumph. The big chief of the crippled bank came out fighting. His message was unreal, but familiar.

All is well at Anglo. No dividend maybe, but no consolidation, no recapitalisation, no merger, no panic. Two fingers to the Government

When David Drumm spoke to John Murray of RTE on Morning Ireland last Wednesday he nearly performed the second suicide on radio in a week. He rivals Rody Molloy, the deposed boss at Fas, for ‘the car crash interview of the year’.

Directors of banks and state agencies share a fatal quality — hubris. When in trouble they eyeball the government. And the government normally blinks.

This week the silent directors of Fas are sitting pretty, undisturbed by a weak Tanaiste, Mary Coughlan. Chairman Peter McLoone should today be sharing an early bath (instead of a €7,500 air fare) with Rody Molloy; but instead he followed our bankers’ example; he told a Dail Committee that he will hang in there, despite everything. All his fellow Fas directors are keeping their heads down. The Government has bottled it. Peter will cling to his €25,000 job.

This weekend too, bank board members are in a state of shock, incredulous that they are still drawing their five-figure salaries.

Drumm was wrong on so many counts in his RTE interview that he should be deeply embarrassed. But bankers do not do ‘embarrassed’. Instead, they do hubris.

Drumm’s biggest boob came when Murray queried his ‘wildly optimistic’ figure for bad debts. The banker responded by hurling out a hostage to fortune: “I think that the investment community, later on when we speak with them, at least my sense is that they will understand and be pleased that the bank would take a stance …”

Fast forward a few hours. The investment community threw a wobbly. Anglo’s shares tanked 27 per cent in a matter of hours, hitting an 11-year low. No-one else on God’s Earth shared David’s cheery outlook.

As Wednesday wore on, the Anglo boss’s bizarre behaviour began to shake confidence elsewhere. It emerged at one of David’s pow-wows with his ‘investment community’ that in the last six months, far from clamping down on developers, Anglo had increased loans to these high-risk cowboys. Holders of Anglo pressed the ‘sell’ button.

Incredibly, Anglo has, even recently, been rolling up interest and lashing out more money for the cowboys to complete their projects.

On Thursday, Anglo’s shares plunged another 28 per cent. Worse still for David, on his dies Horribilis, even AIB gained a few cents .

Anglo is looking like the worst basket case in a deeply troubled sector. Investors have taken flight. No-one can blame them. David’s provision for bad debts has now risen to seven times his estimate in August! A huge credibility gap has opened. As a result of his make-believe bad debt figures, no-one now takes his fantasy profit predictions for the next three years seriously.

Some specialists are forecasting no profits for Anglo until 2011. Ominous news for David as he clutches at straws, claiming that he will top up his inadequate capital ratio with phantom profits. But no profits means no money for the capital ratio. No improvement in the capital ratio, no investors. No investors no deposits. No deposits no bank.

And the results further revealed that Anglo had seen a flood of deposits flowing out the door in September, just before the Government conceded its guarantee. They dived from €10bn to €6bn in a few weeks .

Worse still, investors are beginning to realise that the guarantee lasts for only two years. That makes Anglo a very short-term investment. If it makes no profits for two years and is still paddling its current canoe, the Anglo balloon will go up on September 30, 2010.

Of course, nothing of the sort can be allowed to happen. The Government may yet be forced to take drastic action. Anglo is a candidate for full nationalisation. It is now valued at only €350m, chickenfeed for the €18bn-strong National Pension Fund.

David is making a virtue of necessity by ruling out ‘consolidation’. Not even the vultures hovering over the Bank of Ireland would touch Anglo with a barge pole. His resistance to Government funding is understandable. Government control might put manners on the top brass.

That would spell an end to David’s gravy train. Ditto the boards of every bank.

Murray lobbed a final exocet. In typical RTE style he sounded almost apologetic when raising such vulgarities: “So what will your take-home pay be this year?”

You could almost hear David gulping for oxygen: “Well, I don’t want to get into details of that, but you can see, you can look to 50 and 60 per cent cuts in total remuneration and I think, John, you can work it out for yourself …”

Decoded: Poor David will not be taking home his normal €3m this year. A mere €1m will have to tide him over.

No wonder he does not want government participation, outside investors or indeed any external influence.

So it will be interesting to see what David makes of Alan Dukes, one of last week’s government nominees to Anglo’s board. While the temptation for some nominees will be to go native overnight, Anglo will be a test for Alan. He is an awkward individual so could demand real — not fantasy — figures from Anglo.

The other nominees pose little challenge to any of the banks. With one exception: If I were a banker I would duck Rory O’Ferrall, formerly of Deloitte and Touche. I know Rory of old. When he pursues a quarry he is remorseless. He will make Michael Fingleton weep when he walks in the doors of Nationwide to his first board meeting.

Down the road in Baggot Street, the court of the Bank of Ireland will be chuckling out loud at the nomination of Declan Collier, the man synonomous with the Dublin Airport shambles and with no banking experience. Nor will they have much to fear from the delightful Joe Walsh, a former minister for agriculture but again with no banking experience. AIB has been handed Dick Spring, a former minister for foreign affairs, but again with no banking background.

Brokers around Dublin are advising clients that the banks have won the battle with the Government; that Irish Life stared them down in its skirmish to stop a merger with the Bank of Ireland; that Allied Irish Banks has refused to take over Anglo; that Anglo itself is friendless (apart from an ill-fated flirtation with Sean Quinn) and that Rabobank took one look at the EBS books and ran from the room, begging for mercy.

Round one went to the bankers when they bullied the Government into the guarantee. Round two went to the bankers when they all survived the threatened purge. Round three will be the end game when wonderland surrenders to reality. It is not far off.