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The banks were bust – they just didn’t spot it.
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It’s all there in black and white and makes for fascinating reading: http://www.oireachtas.ie/viewdoc.asp?fn=/documents/Committees30thDail/PAC/Reports/document1.htm
No doubt the material will be filleted for gems that support political partisanship of one flavour or another, but for the ordinary concerned citizen, it’s worth skimming through the lot to get a flavour of what was influencing policy decisions at that time.
Hindsight is a great fellow, but as every historian knows, events have to be judged in their own time. Even a limited perusal of this documentation underlines the point made by the current Governor of the Central Bank, Patrick Honohan, in his recent report, that all the focus in September 2008 was on an impending liquidity crisis not the underlying solvency of the financial institutions.
Indeed, the Financial Regulator, Pat Neary, repeatedly asserted there was no solvency issue. This appears to have been the main thrust of his contributions at meetings held to discuss the options in the lead-up to the guarantee. He was apparently supported in this view by the then Governor of the Central Bank.
External advisors, Merrill Lynch and Goldman Sachs, did not mention solvency as an issue either, though they did draw attention to the heavy reliance within the banks’ portfolios on property lending in an international environment where property asset values were already in freefall.
A bizarre presentation from Anglo Irish Bank made quite extraordinary claims for that bank’s business practices and ongoing solvency; predicting a profit of €1.1bn in 2009. Anglo had evidently convinced Pat Neary of their bona fides; the Financial Regulator was just as emphatic in his advice that Anglo was sound as he was about the other institutions.
Advice notes from the Department and ‘speaking points’ to the Minister for Finance and the Taoiseach concentrated on the liquidity crisis faced by Irish banks; a cashflow problem that would alleviate when stability returned to the international environment. The idea that the Irish banks were undercapitalised or anything other than fundamentally sound was firmly discounted.
The draft legislation for the guarantee was in place from 16 September. Various options to deal with the liquidity crisis were considered at different stages and it’s clear that nobody believed that AIB or BoI were at any serious risk at that point although the systemic risk of any of the six institutions failing was noted; thus ruling out nationalisation. In its advice to the Department on the various options, Merrill Lynch noted that a wholesale guarantee could carry a price tag of €500m, pointing out that the markets were aware the Irish State could not fund a guarantee to that level and that offering it might adversely affect Ireland’s sovereign credit rating as well as annoying other EU partners. The ‘bad bank’ option was also discussed, but one document notes that this option was not pursued in the early stages of the Scandinavian banking crisis of the early 1990s and was a second stage response that would have to be carefully worked out if it became necessary later on.
No doubt there’ll be lots of political sparks flying about all this over the weekend, but one unavoidable conclusion is that none of those involved in managing the crisis had any sense that it might deteriorate so quickly. Certainly not to the point that five of the six banking institutions ultimately covered by the guarantee would face a solvency crisis within a couple of months. Nobody realised the banks were already bust.
Why did the judgement that the banks were systemic mean that they couldn’t be nationalised? Surely it just meant they couldn’t be allowed to fail?
This is a very good piece helping to fill in the jigsaw pieces a little. Some views of mine on the issue of why the banks werent just nationalised-
It is a fact that the deposit reserves of much of the network of Credit Unions around the country were invested in Anglo and then invested by Anglo in a variety of derivatives. This is not exactly a secret but hasnt been used as part of the bailout narrative because the banking “system” couldnt withstand a run on small deposits. To nationalise Anglo early on would effectively be to nationalise credit unions. To let Anglo fail would have had a chaotic effect on small credit union depositors from Inishowen to Loop head.
Drive through any one horse town in the country and see the big taj mahal of a credit union every ten miles or so. They are all part of Seanie’s house of cards.
Cowen had an expression he used in Dail debates in the early part of his career ” hindsight does not a statesman make”. He hasnt used it lately when the expression would seem particularly and universally apt.
Perhaps steps taken now with the benefit of hindsight will mark a statesman by his actions.
I would like to see the exact position re credit unions clarified—they were used as an excuse for the blanket guarantee but I don’t think that was quite accurate. Surplus credit union funds could only be invested in guaranteed products–cash, govt bonds,etc, no investment in shares, no open ended bonds so the only credit union funds that should have been guaranteed were cash deposits and I think this amount was relatively small.Maybe some credit unions were “investing”to maximise their profit but that was against credit union rules.
The situation crystallised when AIB and BoI approached the government looking for action as it was apparent Anglo would collapse within hours because it could no longer access cash on the markets. The two big banks feared if this happened it would drag them down too. Previously, as set out in the material published yesterday, the discussion was about various options facing the government when the crunch inevitably would come, as it must. But in the final run-up to the guarantee, their options narrowed.
As I understand it, if the government had nationalised Anglo at that point, the other banks would have come under increased pressure in the market and within a short time the government would have been forced to nationalise them also. Nobody in their right mind would have wanted to do this as a solution to a perceived liquidity problem. Pre-emptive nationalisation is not considered a very good idea, particularly when it’s unclear exactly what liabilities you may be taking on.
The guarantee, as a middle way, was designed to buy time. It was a gamble in that if was subsequently called in, the State couldn’t afford it, and everyone knew that. But it was a reasonably good bet that it would never be called in. All authoritative commentators, including the current Governor of the Central Bank, agree that the guarantee was necessary at the time. The argument, subsequently, has been about the scope of the guarantee and whether or not it should have included sub-bondholders.
Des, as far as I know, the credit unions would, like pension funds, were classed as senior bond holders (?); so the guarantee was designed to protect them. If the banking system had failed, it would have taken the credit unions out as well since they get their funds from the banks in the first instance, whether it was Anglo or AIB or BoI, I’m not sure it matters all that much. It became evident later on that some Credit Unions may have been involved in some risky ventures. Maybe the Banking Commission will throw further light on all this?
The cold, horrible reality is that a collapse of the banking system would have shut down the entire economy. In retrospect, people tend to overlook that. Understandably, since it was avoided. The crux of the argument since has been whether or not, at the time of the guarantee, the politicians and the DoF should have known that the banks, particularly Anglo, were already insolvent. I think you could argue about that until the cows come home. But from the material that’s been published to date, it seems the focus was squarely on the liquidity issue and besides, the Financial Regulator was adamant that the issue of solvency didn’t arise, as were the banks themselves.
The politics of all this, of course, are another day’s work!
Des, regarding the Credit Unions exposure to Anglo, here is an excerpt from the Sunday Business Post, 25 April 2010:
The organisation representing credit unions has said that it invested just €99 million in Anglo Irish Bank bonds, and has called on the government to ‘‘cease referring to these investments as justification for guarantees and the continuation of Anglo Irish Bank’’.
In a statement to The Sunday Business Post, Kieron Brennan, the chief executive of the Irish League of Credit Unions, said it was ‘‘unwise and irresponsible’’ to suggest that the credit unions had large investments in Anglo.
http://www.thepost.ie/story/eyidideycw/