February 16, 2011
By Staff Reporter
By Stephen McKinley and Andrew Bushe
Ireland’s economy has suffered a devastating double whammy as scandals rocked pharmaceutical giant Elan and then Allied Irish Banks.
As both stocks tumbled last week, the taoiseach, Bertie Ahern, Tanaiste Mary Harney, and Charlie McCreevy, the finance minister, moved to reassure investors at home and abroad as financial experts offered verdicts on the scale of the damage.
Elan has been fighting to restore its credibility after a Wall Street Journal article challenged its accounting practices, drawing an unnerving parallel with the collapsed U.S. energy giant, Enron.
Meanwhile, AIB has launched an investigation into the loss of $780 million by foreign exchange trader John at its Baltimore subsidiary, AllFirst.
The Irish Stock Exchange contains only 80 companies, and it is dominated by Elan and AIB. ISE chief executive Tom Healy said the joint valuation of the two companies had dropped from 36 percent of the exchange at the beginning of the year to 25 percent now.
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But analysts generally agreed that the AIB loss and Elan’s woes are fundamentally different, the latter being the more serious long-term problem.
“What makes AIB different from Elan is that it’s a once-off,” said an Irish analyst who now works in New York, and who declined to be named. “What’s surprising to many people is how AIB didn’t even have an internal audit in the last year. Elan’s problem is a long-term perception that they’ve been economical with their accounting information.”
A senior business journalist, based in Dublin, agreed with this analysis.
“This is very poor for Ireland Inc.,” he said, also on condition of anonymity. “This will fuel a perception that Irish companies are seen to be untrustworthy.”
Echoing the analyst, he added, “AIB is clearly a once-off, whereas Elan is potentially much more serious. There may be some pretty shaky planks ahead for Elan.”
He also noted that after Elan’s shares plummeted after the publication of the Wall Street Journal article two weeks ago, many small investors had bought up the stock, but were then burned when it fell even further.
A small investor, Maureen Kennedy, who is from Athlone, told the Echo that she had lost about $6,000 on 150 Elan shares in the last two weeks. She cashed out in disgust.
Kennedy, who now lives in Virginia, said her confidence in Elan had been high. She had bought the 150 shares two years ago, and “it had gone up and up, it had split, and continued to rise.”
“Now it’s going to be a mess for so long, even if it comes back up, it’ll take a long time,” she said. “Dishonesty seems to be rampant in Ireland,” she said. Kennedy noted that she had heard allegations of Elan having accounting irregularities about “a year and a half ago,” but that the company’s financial information seemed sound. She added that Ireland’s experience of the so-called Celtic Tiger had reminded her of her mother’s saying that “if you put a beggar on horseback, he’ll ride to destruction.”
In the Wall Street Journal article about Elan, reporter Jesse Eisinger quoted a former Securities and Exchange Commission chief accountant, who said that Elan was ” taking money out of one pocket and putting it into another. That is a charade.”
Irish journalists are now reporting rumors that a number of international companies are looking at both AIB and Elan as possible takeover targets.
Finance Minister McCreevy and Taniaste Harney admitted that the events have been damaging. AIB and Elan have been associated with Irish success, said McCreevey, “so, therefore, anything that affects them affects the image of Ireland.”
Harney welcomed the independent AIB inquiry by a U.S. expert. The scandal, she said, was not only damaging for the bank but also for “corporate Ireland.”
The ISE’s Tom Healy sought to assure people that the inquiries into both Elan and AIB should be trusted to reassure public confidence. He also emphasized that the two cases were essentially unrelated.
“It takes quite a while to deal with that sort of inquiry because you have to explain it is two unrelated things happening and these businesses are still there,” Healy said. “There are also references to Ireland’s growth rate more than halving without pointing out that we are still have the highest in the civilized world,” he said.
Supervisors from Ireland’s Central Bank have traveled to the U.S. to investigate what went wrong at the Allfirst subsidiary of AIB.
Central Bank spokesman Neil Whoriskey said that while day-to-day supervision of Allfirst was done by the U.S. Federal Reserve Bank, they would ultimately be responsible because it was a wholly owned AIB subsidiary.