Small investors are asked: 'where is the next Enron and is it in yourportfolio?' Both Elan and AIB are raising worries
The bad news this week about AIB and Elan has shaken investor confidence deeply here but the concern seems to be centred on accounting practices and the absence of corporate oversight, rather than a reflection on the Republic's business.
"I don't see this as having anything to do with Ireland," said Mr Mark Goodman, an analyst with Morgan Stanley. "But Elan's problems have put a cloud over other medium-sized pharmaceutical companies. It's affected the whole mid-cap sector. It's going to take a long time to rebuild investor confidence."
US investors are especially alert right now to corporate mismanagement. The failure of energy giant Enron, the collapse of Tyco international's share price, and the bankruptcy of retailer Kmart have all contributed to heightened concern. Newspaper business pages and internet websites keep hammering home the question to small investors; where is the next Enron and is it in your portfolio? Both Elan and AIB are raising worries.
Some analysts said that the scandal at AIB may reach into management. The bank alleged that a currency trader in its Baltimore, Maryland subsidiary conducted bogus trades and lost some $750 million (€864 million). Based on those losses, analysts said that employee Mr John Rusnak would have been taking currency positions of more than $1 billion, a figure far beyond what any individual trader would be permitted to do.
"This is way out of kilter for risk limits at a regional bank in Maryland," currency analyst Mr David Gilmore told the New York Times. "It was collective stupidity or a ship of fools,"
The fact that AIB's system of controls and oversight failed so completely may be a bigger problem for the company's image to investors than the actual dollar losses incurred.
One banking analyst, who did not wish to be named, told the Dow Jones newswire: "One thing is certain: top management have a lot of explaining to do and, so far, they haven't been able to convince analysts and markets that they're in control. The management status quo can't continue. This is a gargantuan mistake and someone has to take responsibility. The only way out is a serious corporate restructuring."
Other analysts were more forgiving. Fox-Pitt, Kelton analyst Mr Jon Kirk said: "This fraud could've happened to any bank. No matter how good your risk controls are, if people decide to rip you off, they can do it."
He does, however, think some managers should get "flak" for not picking up the suspected fraud sooner.
Mr Kirk said takeover interest in AIB was now heightened, especially from Royal Bank of Scotland. While no immediate actions were being taken by mutual fund managers, concern is spreading about AIB's potential for growth.
"They don't have the surplus capital to expand and they can't grow organically," said one analyst. "This has left them no room to manoeuvre and boxed into a corner with few options."
The Irish banking market, where AIB earns 55 per cent of its profit, is fully mature, they said. It bought two banks in Poland in the 1990s and had hoped to grow them. It also had high hopes for its US operations, where it was looking to buy another.
Elan, which had been the biggest stock on the market until last month, has plunged by two-thirds so far this year, in part because of an article in the Wall Street Journal Europe that raised concerns about some of its accounting practices. The company earlier this week issued a profit warning, citing lower-than-expected revenue growth, product delays and higher costs.
Equity traders said there was no sign that investors were treating the two cases as anything other than individual problems at companies that happen to trade on the same bourse.
Elan first spooked investors with a warning that profit and revenue this year would be lower than analysts had expected. It also disclosed that a fifth patient in a clinical trial for its Alzheimer's vaccine had shown signs of a potentially dangerous side effect.
