The Irish tax payer did not bail out AIB over the ICI

Brendan Burgess

Brendan Burgess

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Time and time again, I hear the same old rubbish trotted out that the Irish taxpayer bailed out AIB.

It did nothing of the sort - AIB and the Irish taxpayer combined, bailed out the policyholders of ICI.

AIB bought the shares in ICI. As such it had a similar relationship to ICI as I have to Smurfits or any other company in which I own shares. If Smurfits goes to the wall, I will not be asked to contribute to paying off the debts of the company. That's what limited liability is all about.

If AIB had not bought it, ICI would have gone into administration anyway - just like the PMPA did. AIB owned and controlled ICI for a very short time. They were well within their rights to wash their hands of the company. But the Irish government just won't let bad insurance companies die. They rescue them to protect the policyholders and we all have to pay for it.

The British government adopts a better stance - Independent Insurance wrote insurance at unprofitable rates and they were let go into liquidation.

You can criticize AIB for stupidly buying ICI. You can criticize AIB for allowing themselves to be ripped off by their currency dealers. You can criticize AIB for their part in the non-resident accounts. But I don't think people should be claiming that the Government bailed out AIB.

I am a shareholder in AIB and I have been strongly critical of them in the past. But let's be fair to them.

Brendan
 
Hi Brendan - Let's put it another way - The Irish taxpayer (partially) bailed out the customers (policyholders) of a subsidiary of AIB. AIB/ICI of course, went on to benefit from the ongoing business from those customers and the value of the 'ICI' brand, at the expense of the Irish taxpayer.

Your analogy to an administration scenario doesn't really stand up. If it had gone into administration, AIB/ICI would not have been able to continue to trade, continue to make money from those customers etc.

Regards - RainyDay
 
AIB

Disagree with your analysis,Brendan.

The effect of the Government's action was to underwrite the survival of AIB/ICI.
In a commercial transaction an underwriter of risk is rewarded and in distress situations financial assistance normally results in equity participation.

Your point about AIB's relationship with ICI being like your's with Smurfit ignores the fact that in the financial world, if the parent walks away from the liabilities of a wholly-owned subsidiary(whether explicitly guaranteed or not) it is out of business.All of AIB's funding would have evaporated in minutes if it had walked away from ICI.

I know its a hoary chestnut now, but we were poorly served in this episode by certain politicians whose lack of commercial savvy was exploited (correctly)by Scanlon & Co.


(I've removed some references to specific individuals from this post - Tommy)
 
Re: AIB

AIB got no further benefit from ICI after the administrator was appointed. As far as I am aware, the administrator sold the brand and book and used the proceeds to runoff the business.

I take the point that if AIB walked away from a subsidiary, its reputation would have been damaged. But would it have been damaged beyond repair? It certainly would have limited its losses, but do you really think it would have had to cease to trade? Is there any similar example of a bank walking away from a wholly owned subsidiary?

Brendan
 
Re: AIB

Hi Wings

I might be wrong, but my memory of the situation is different.

AIB found that a company which it had bought just a year earlier was insolvent. It told the government that it was putting the company into liquidation and walking away from it. The Government asked it not to and put it into administration instead.

It would have been much cheaper for AIB to walk away from it completely and let the liquidator cancel the policies and pay off the claims. I don't think that AIB had any guarantees in place to anybody.

However, as Monksfield pointed out, while that was legally possible, would it have meant the end of AIB because it would never have been trusted again? I don't know the answer to that.

By the way, I don't think that AIB bought the ICI from the state owned Irish Shipping!

Brendan
 
Re: AIB

I don't think it would have meant the end of AIB. Banks and other large financial institutions sometimes formally guarantee the liability of their subsidiaries, and other times do not. Those dealing with the subsidiaries - at any rate, those whose confidence in the parent bank really matters - know that it makes a difference whether the subsidiary is guaranteed or not. If it is not guaranteed, they know that the bank can walk away from it, and may do so if that seems to be in the best interests of the banks depositors or shareholders. They may be disappointed and upset if this happens, but they will know that the bank has not welched on its legal obligations, and they will know that there is no threat to the solvency of the bank itself or to the safety of its deposits. Hence if AIB had abandoned ICI and the state had not stepped in, AIB would have survived.
 
I agree with BB but ...

... possibly even more emphatically, despite the fact that I am not, and have never been, a shareholder in AIB. (My pension funds may have been, but I had no influence on their decision if they did).

My points:

1. Not so sure that AIB could have gotten away with claiming limited liability. Legally, they would have the better arguments, but even the law is now shifting on this. In 1983, who can now say what might have happend if it had been tested ?

2. "If AIB had not bought it, ICI would have gone into administration anyway - just like the PMPA did. AIB owned and controlled ICI for a very short time." And everyone - except me, apparently - forgets that it was the State that controlled ICI before AIB, and that it was during the earlier period that the losses were incurred.

3. If the State had refused to intervene, AIB would not have gone "bust". IMHO.

4. The State it was which insisted that all the loss-making contracts be honoured in full. That was the reason for the ridiculously high cost of the ICI failure. Does this remind you of anything more recent ? Hint: Anglo.
 
A 10 year-old thread gets resurrected - are you This post will be deleted if not edited immediately in disguise? Or just another Sean Quinn apologist?
 
It's interesting in the current climate to re-visit old examples of how the state screws up whenever it tries to "fix things" in the private sector.
 
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