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The costliest St Patrick’s junket ever
Read more about: Economy, NAMA 
March 2008. It’s an important period in the Irish banking crisis. How much space does it get in the Honohan report? 1 paragraph (8.5). Joan Burton deserves credit on this one. She’s been pushing for some time now for the government to explain its thinking and actions in March and April. It comes up again today with Anglo’s internal notes showing that they believed that the back-to-back deposits that they set up in March 2008 had government support. Incidentally, Anglo’s furrin partners on those deposits included RBS, AIG, and Hypo Real Estate. A nice “where are they now” list. Side question: how many of the deposits were run through IFSC operations? Anyway, while Honohan doesn’t give us a tick-tock of this period, he does tell us that there was a high level Domestic Standing Group already operational and monitoring the situation which had representatives from the Department of Finance.
And now the punchline: when important decisions were being made about the form in which shoring up Anglo should take, and leading to a technique (the back to back deposits) that would later be viewed as misleading, where was the Minister for Finance, Brian Cowen?
He was on an extended St Patrick’s Day official visit, en famille, to Malaysia and Vietnam.
And then when he came back from Malaysia ,Bertie had to get the long goodbye and address Westminister and the Capital and Stormount and them Brian had to be installed, there was no one in charge.I don’t wonder Neary and Hurley were paid so handsomely to keep quiet.
P,
Joan Burton is making a political charge. But do the facts support it? No they don’t, according to the Governor of the Central Bank. The focus of the Regulator and the Central Bank in mid-2008 was on liquidity, not the solvency of Anglo Irish or any of the other Irish banks. They didn’t spot the solvency issue, so they could hardly, therefore, have informed the then Minister for Finance about an impending solvency crisis that they didn’t recognise. Even at the point, several months later, when the Bank Guarantee was being introduced, the issue was still being presented as one of liquidity, not the solvency of the banks. It was Fine Gael’s Michael Noonan who first raised the question of solvency during the Dail debate on the guarantee scheme.
When this issue was raised with Honohan at the Finance Committee earlier in the week, he was clear about what he describes as a failure in the system. But he was also clear that this was an adminsitrative failure, not a political one:
Joan Burton: In March 2008, the share price collapsed in what was called the St. Patrick’s Day massacre. In Dublin, London and probably in New York, a series of brokers in particular were aware that something had gone wrong with the bank and they did what they normally do, they withdrew their confidence in the bank by collapsing the share price. What warning signs or red flags did that send up in the Department of Finance, the Central Bank and the Financial Regulator? Does Professor Honohan think it credible that somebody who is at the apex of the structure as Minister for Finance, could have been left uninformed by the officials in his Department, by the Governor of the Central Bank – there are regular formal and informal meetings with the Governor of the Central Bank – and the Financial Regulator? I ask Professor Honohan to comment because it seems to me, and I think it is implicit in his report, that action should have been taken earlier. Ordinary bank analysts were reading the signals of a growth structure that was unsustainable and then there was the share price collapse a year and a quarter later. From there on in, there was an incredible crisis in that bank. We see from Mr. Casey’s published affidavit in The Irish Times last week, that there was within the institutions what he described in capital letters as a green jersey agenda. What was happening there? Were they in awe because the people in the bank were extraordinarily rich? In footnote 12 on page 17, Professor Honohan states that they were “well-liked in political circles”, and of the other principal character in Irish Nationwide that he was “politically well-connected”. Will Professor Honohan comment on the meaning of the phrases “well-liked in political circles” and “politically well- connected”? These people were not politically connected to me and I would like him to expand on what he means by that?
Professor Patrick Honohan: Let me find one item before I comment. We say at several points and when we do not say it, we imply, that the regulator should have tumbled to the fact that Anglo Irish Bank was a very severe risk of things going badly wrong. We have that illustration of just because a bank looks as if its loans are backed by property, when one is in a bubble, the property can very suddenly lose its value. That risk should have been factored in but it is clear that this fact was not spotted. The sentence I was looking for in the report is where we actually break with custom by saying explicitly in the case of Anglo Irish Bank that as late as the middle of 2008, the regulator definitely had no solvency concerns about Anglo Irish Bank. That is a salient matter. The Deputy’s question runs on to ask whether the Minister for Finance should have taken some action or should have known this.
Deputy Joan Burton: I asked whether he would have known, or would have been advised.
Professor Patrick Honohan: He was not advised by the Central Bank or the Financial Regulator because the Financial Regulator did not have that. In paragraph 8.19 I state: “The clear consensus was that the problem was essentially one of liquidity rather than of solvency”. There is another paragraph where I state explicitly Anglo Irish Bank. What were they doing if they were not worrying about Anglo Irish Bank’s solvency? They were worrying about liquidity. They were seeing depositors not rolling over their funds. I am not talking about people coming in off the street but wholesale depositors, foreign institutions, foreign corporates, foreign banks not rolling over their deposits because they had decided that Irish banks were too heavily indebted overseas and so forth. This meant there was a drain on liquidity about which the Central Bank was very concerned and it could see that if this continued, the banks would have problems, which they did at the end of September. However, almost a year in advance of that, the Central Bank was starting to be concerned about that drain away of liquidity and its entire focus was on the fact that our banks were not able to roll over deposits from largely external depositors. We in Ireland have to take action against this drain of deposits, not in a sense stopping to consider or have a second thought at whether there was any justification for such a drain in deposits, as indeed there was for depositors in Anglo Irish Bank, as we now know. We now know there was something in the point of view of the depositors who were not willing to roll over their deposits. They did not know that the deposits would be guaranteed ultimately. That preoccupation with liquidity crowded out all other concerns. It was not as if they were sitting around doing nothing, they were working very hard to try to arrange that the liquidity would be available.
I was asked about the green jersey agenda and this touches on some matters that are under investigation and I do not want to talk about them. Largely the green jersey agenda was a concern to “Let’s make sure the Irish banks have enough liquidity because the people out there on whom we have relied are not rolling the liquidity.” I am referring to the situation two years ago and this was an understandable concern, but in a way it was looking at only one dimension and not the dimension of solvency. That is what the Minister for Finance would have been worrying about. He would have been asking about liquidity and whether we had it under control and if they would be a problem. He would not have been saying—–
Deputy Joan Burton: Does Professor Honohan think the Minister for Finance must have been told something by his officials?
Professor Patrick Honohan: I am sure the Minister for Finance was told in the sense that I have not tracked documentary evidence. However, I am quite confident that the Minister for Finance, would have been informed on a regular basis of the liquidity positions of the Irish banks.
Deputy Joan Burton: Did Professor Honohan think that speaking to the Minister for Finance, and the serving Minister for Finance at the time, was outside his remit?
Professor Patrick Honohan: No, I am trying to avoid putting on record something that I am not 100% sure of. The domestic standing group, which we describe in the report, is a committee between the Central Bank, the Financial Regulator and the Department of Finance, the NTMA sometimes attended also. This meets on a regular basis at senior level and it communicates all relevant information, quite freely and openly. I can be sure, obviously I am thinking of my current situation, and I can inform and discuss things with the Minister for Finance and do. I can also be sure that when I am talking to the Secretary General of the Department of Finance that the message I would like to have conveyed will be conveyed to the Minister. I do not have any doubt that the Minister would have been aware of the liquidity situation, but he would not have been aware of the solvency concerns because the regulator did not have solvency concerns.
Deputy Joan Burton: Is it not the primary role of the Central Bank and of the Department for Finance to ensure the prudential side of banking?
Professor Patrick Honohan: Absolutely, and this is why we identify——
Deputy Joan Burton: Will Professor Honohan take me through this again? We have top people earning large salaries and while they are looking at liquidity they totally forget about the solvency of the banks.
Professor Patrick Honohan: No, it is not good. This is what we are identifying as failures. No doubt about that.
Note that Honohan is avoiding the back-to-back deposit issue, no doubt because of the investigation. And as Betty says, this was a very distracted government. Bertie’s victory lap was under way and Cowen’s coronation was beginning. But if Cowen feels that he was ill-served by his Sir Humphreys, he should say so.
P,
If he tried to ‘blame’ the civil servants for failing to spot that there was a solvency issue coming on the back of the liquidity issue, Cowen would be accused of trying to shift responsibility onto ‘hardworking public servants’. It’s a no-win situation politically. The big question is who in which banks may have known that they were facing a solvency crisis as well as a liquidity crisis; and when. If they had any inkling of the true nature of their predicament did they make appropriate disclosure to the regulatory authorities? This is obviously one for the proposed Commission, as the Honohan report could only go so far. But Honohan effectively scotches the political conspiracy theory that was put to him. The mundane facts are bad enough; they hardly need the embroidery of conspiracy theories.
I think that this review is the government’s response to the glaring DoF issues
http://www.rte.ie/business/2010/0622/banks2.html