Mistakes Were Made …

by Henry on July 16, 2010

I’m quite glad I’m not an Irish taxpayer, or I’d be very pissed off indeed today. Details are beginning to emerge about the reasons why the Irish government stepped in to offer an unconditional guarantee for the liabilities of Irish banks at the beginning of the crisis – a decision which really has had very unpleasant consequences indeed for the Irish economy. Three fact stand out. First – that perhaps the most urgent precipitating factor seems to have been the unfortunate fact that no-one wanted to lend money to Anglo Irish Bank. From an “advice memo”:http://www.oireachtas.ie/documents/committees30thdail/pac/reports/documentsregruarantee/document3.pdf by Merrill-Lynch to the government

bq. However, liquidity for some could run out in days rather than weeks. Anglo Irish has recently approached the Central Bank with a proposal to create a new funding facility that the Central Bank would accept commercial mortgage assets in exchange for cash. Anglo are rapidly approaching the point where they have exhausted all possible sources of liquidity available via the market or their ECB eligible collateral is close to being fully utilized.

Readers of Fintan O’Toole’s “book on the topic”:http://www.washingtonmonthly.com//features/2010/1005.farrell.html may recall his aside that “[i]t may be an exaggeration to call Anglo Irish a private bank for Fianna Fáil’s more flamboyant friends—but only a small one.”

Second – that the option that was chosen – offering an unconditional guarantee for all bank debts, was actively disparaged by the Government’s advisors. The memo recommends that the government provide a secure lending scheme instead, to provide short term liquidity. It effectively dismissed the possibility of an unconditional guarantee in a short paragraph, saying that it would:

bq. almost certainly negatively impact the State’s sovereign credit rating and raise issues as to its credibility. The wider market will be aware that Ireland could not afford to cover the full amount if required.

The advisors noted that this might work better if other EU countries mounted a coordinated effort – the implication being, I think, that it would only be a good deal if you got Germany and others to pay for it.

Third – that the government’s “decision to ignore this advice”:http://www.irishtimes.com/newspaper/breaking/2010/0716/breaking2.html?via=rel was apparently based on input from both the Department of Finance and other officials including the Financial Regulator.

bq. The guarantee was “not given lightly” but was necessary, on the “strong advice” of the Central Bank and the Financial Regulator, to deal with the unprecedented disruption in international markets. “As far as the question of “moral hazard” is concerned, it will be a priority for the Government to ensure that the highest regulatory standards and standards of corporate governance apply in all of the institutions concerned including in relation to lending practices to safeguard the interests of taxpayers against any risk of financial loss,” it concluded. Another document revealed former financial regulator Patrick Neary told Taoiseach Brian Cowen that Anglo Irish was in good health only days before the Government introduced the bank guarantee on September 29th, 2008. Mr Neary told the Taoiseach “there is no evidence to suggest Anglo is insolvent on a going concern basis – it is simply unable to continue on the current basis from a liquidity point of view”.

This again raises some interesting questions. Mr. Neary plays a starring role in O’Toole’s book for his apparent connivance at Anglo Irish’s cooking of its books.

bq. On 24 September, five days before the government decided on its guarantee, Pat Neary held a meeting with Anglo’s finance director Willie McAteer and CEO David Drumm. According to the Sunday Tribune‘s account of a confidential Anglo Irish audit report, McAteer told Neary that ‘the bank would be “managing the balance sheet at year end”‘ meaning that Anglo would be cooking its books to make the situation at the end of its financial year (30 September) look healthy. The report records Neary as replying, ‘Fair play to you, Willie.’

This casts an interesting light on Neary’s assurances the following day. I imagine that there is more to come.

{ 19 comments }

1

John Quiggin 07.16.10 at 10:32 pm

A minor point is that Irish people should be pissed off not (primarily) in their capacity as taxpayers but in their capacity as users of public services, since it is the latter which will be cut to pay for the largesse extended to the financial sector.

2

scathew 07.17.10 at 12:33 am

Small typo “Three facts stand out”, not “Three fact stand out”.

No biggie though…

3

P O'Neill 07.17.10 at 2:07 am

Among the little nuggets in yesterday’s document dump is the Vampire Squid (surprise!) popping up in late September 2008 to reassure our 3rd rate Sir Humphreys that Irish Nationwide — the building society version of Anglo — was fundamentally sound and just had a liquidity problem. It turned out that Irish Nationwide was (a) an important player in Anglo’s corporate governance problems and (b) insolvent.

4

hix 07.17.10 at 4:37 am

All debts? If only Ireland actually had guaranteed the debt of all Irish banks, including Depfa and all those Landesbanken special purpose vehicles, that would have gone some way to internalice all the damage brought upon the world by the Irish finance fraud and tax dodging Industry.

5

Tomboktu 07.17.10 at 9:29 am

And a slightly bigger typo: the paragraph that begins “Readers of Fintan O’Toole’s book…” is presented in your post as if it were part of the Merril-Lynch document. [If only they had said something so partisan!]

6

Current 07.17.10 at 12:25 pm

I’m an “irish taxpayer” unfortunately, since I live there.

Something that isn’t mentioned here is the role of newspapers. A prominent financial commentator in an Irish newspaper recommended the guarantee, that was a major reason why it was done. I can’t remember which commentator though.

7

P O'Neill 07.17.10 at 2:27 pm

#6, David McWilliams, though he now says what was implemented was not what he recommended.

But in fairness, he wasn’t in the room when the Lenihan/Cowen decision was being made.

8

y81 07.17.10 at 6:15 pm

Well, if I were an Irish taxpayer, I’d be mostly confused at this point. What should the Irish government have done? Why was it wrong to listen to the Department of Finance instead of Merrill Lynch? (I feel like I’m missing something there.) Did Paulson, Geithner and Bernanke handle things better? (They have basically given out a grab bag of liquidity facilities and guaranties–perhaps optimally designed in every instance, perhaps not.) Should there be an Irish Tea Party, to denounce the Irish bailouts? Will there be?

9

Current 07.17.10 at 10:11 pm

> Well, if I were an Irish taxpayer, I’d be mostly confused at this point.

Oh, I’m certainly confused. And so is everyone else.

> Why was it wrong to listen to the Department of Finance instead of
> Merrill Lynch? (I feel like I’m missing something there.)

Why guarantee all deposits? My father has bank accounts with irish banks in the UK, even he was covered by the guarantee.

If a bailout was necessary to Ireland then it was to protect the solvency of Irish banks and Irish households and businesses. Where is the argument for protecting foreign investors too?

(I don’t agree with the bailouts in the first place, especially not for Ireland.)

10

James Conran 07.18.10 at 12:25 am

The guarantee has clearly been disastrous. A guarantee might have made sense if the banks were facing only a liquidity, rather than insolvency problem. It doesn’t seem remarkable to me that the authorities judged this to be the case, wrong though they turned out to be. What does seem truly remarkable is the decision to guarantee the existing stock of debt – not just future issues. This was eaten bread from a liquidity point of view – why guarantee it?

11

Martin Wisse 07.18.10 at 8:41 am


What does seem truly remarkable is the decision to guarantee the existing stock of debt – not just future issues. This was eaten bread from a liquidity point of view – why guarantee it?

If I’m reading th eoriginal post correctly, sheer cronyism?

Meanwhile in the Netherlands, we had a knockout, dragdown fight about who got to own ABN AMRO which helped to speed the collapse of ABN AMRO, Barclays, RBS, Fortis bank and ended up with both Fortis and ABN AMRO in state hands and being fused together. If the then minister of finance had put its foot down to the takeover, this might have been avoided…

12

zamfir 07.18.10 at 2:06 pm

Martin, I can hardly imagine a better.outcome.for the dutch state. Abn was the bad apple of the dutch banking system, ambitious enough to play on the big markets yet stupid enough to get suckered into every bad deal around. As it is, the brits paid for most of that, Belgium took.another hit, and.the Netherlands paid up tor some but got ownership of the healthy local bits return.

13

Martin Wisse 07.19.10 at 6:09 am

That’s true, but it seemed to be more luck than wisdom.

14

EWI 07.19.10 at 9:01 am

Readers of Fintan O’Toole’s book on the topic may recall his aside that “[i]t may be an exaggeration to call Anglo Irish a private bank for Fianna Fáil’s more flamboyant friends—but only a small one.”

No exaggeration at all, I think. A party comprised of (i) crooks (ii) those who benefitted from the crooks’ largesse and (iii) those who looked the other way.

I don’t think they’re capable of reforming, either. There are still odd things going on – as NAMA is demonstrating on a weekly basis.

15

Ray 07.19.10 at 1:20 pm

Public cruxifiction is probably a little too far, but can we not at least pack all those responsible off to some half-built estate in the middle of Longford?
(and yes, the joke is obvious)

16

Ray 07.19.10 at 1:21 pm

cruxifiction?

17

ajay 07.19.10 at 2:02 pm

Like scientifiction, but Christian.

18

Map Maker 07.19.10 at 4:05 pm

Ireland is structurally short deposits (or long loans, depending on your POV). Every bank was and would face an immediate liquidity run were it not for the guarantee. Until Ireland (and much of the EU) address the imbalance between deposits and loans to get them in-line like the US and Asia, the risk of bank runs on countries will remain.

None of that excuses the shameful relationships among the developers, the government and the bankers, but the greater threat to the country would have been a complete end of foreign funding of the deposit shortfall.

19

Current 07.21.10 at 7:13 pm

To follow up on Map Maker’s point. The UK “Post Office” bank is a trading name of Bank of Ireland. The banks would have been under threat because they were importing liabilities to fund their loans in Ireland.

But, I think it’s doubtful that this made guarantee necessary. The Irish banks are relatively small, much smaller than GM which was taken through bankruptcy quickly. That could have been done with the Irish banks, or the Irish government could have made a more special case arrangement to support existing external liabilities without also supporting new ones.

As for the Fianna Fail government, of course they are corrupt, all governments are corrupt. I don’t think that Fianna Fail are any worse than most, they are just not as good as hiding and spinning their corruption. I’ve lived in Britain and Ireland, comparing NuLabour and Fianna Fail it’s clear that the big difference is that Labour had much better publicity and much tamer press and television. I doubt Fine Gael would have been any better.

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