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Pari Passu, meet Supervening Event
Read more about: Economy, Scandal 
The AIB bonus payment row may be shaking loose some of the practices of the calcified Irish legal-political complex. The government at first appeared to be in its standard legal paralysis mode when it comes to doing something it doesn’t want to do — claiming that legal advice meant it had no ability to revisit the bonuses which were earned before the guarantee. But as the basic economics of pumping billions into a bank while 40 million walks out the door came into view, all of a sudden the Minister goes into creative barrister mode –
The financial difficulties of the bank were clearly a supervening event which was not contemplated at the time of any agreement in relation to bonus payments. You will be fully aware of the extent to which State support, in a variety of forms has already been provided, and of the fact that without such support AIB could not have survived until now. I am sure you are also conscious, as I am, of the urgent need for further support, on an enormous scale. Without such support, these bonuses clearly could not be paid. Furthermore the bank could not have continued to operate without this financial support and the employees claiming the bonuses would almost certainly have had their employment contracts terminated.
Think about it: the bank made some financial commitments in the past, but got into difficulties that were not contemplated at that time, the state is now putting in money but without the state money, the previous commitments would have gotten a Hasta la Vista, Baby, so they can’t complain about being made to take less now.
Those are the senior unsecured bondholders in Irish banks, up till now told they rank equally with depositors and can’t be touched. Now that we have the principle that the government can pick and choose among creditors when it puts in new money, can’t we find some lawyers to work on the details for the bonds?
UPDATE: The Irish Times Carol Coulter lays out the legal case and the two elements — implied terms in the contract that the bonuses would come from from the company’s own resources, and a public interest defence that comes with public money — are exactly the arguments that could apply to the bondholders.
We were constantly being told that we had no option but to bail out AIB but now we are being told that AIB would not be bailed out if bonuses were paid.
“Oh what a tangled web we weave, When first we practice to deceive”.
And what will they do if they have a letter saying no capital for AIB if the bonuses are paid and the bonuses are paid anyway?
Then we would have the mother of all supervening events–the state withdraws its money and we have a bank failure(or the bonuses are paid under the counter,nudge ,nudge , wink ,wink.)
It all goes to show that it’s never a good idea to have politicians running banks. Of course AIB should not pay these bonuses, that goes without saying. The problem arises when public outrage becomes the arbiter of what should or should not happen within a company, whether it’s the ESB, for example, where avereage salaries are way in excess of the national average but whose workforce can hold the state to ransom overnight if their position of privilege or entitlement is threatened or if it’s the banks who, right now, happen to depend on the state for survival. When ESB staff got a pay increase a couple of years ago, after the same increase had been cancelled for all other public sector workers, there was a bit of huffing and puffing and then it was all quietly dropped. But then the ESB is not alone essential – they turn the lights on and off for industry and the population – they are profitable.
Personally, I don’t believe for one moment that the state would refuse to put any more money into AIB if they had persisted with the line that they had no legal option but to the pay this back-dated money to their staff. The fact is that AIB is all but nationalised and therefore the state can call the shots on who gets paid what and when. Lenihan’s feint is a neat trick, for the moment anyway.