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The Anglo cross-currents
Read more about: Economy, NAMA, Scandal 
It’s going to be a long weekend for Brian Cowen so this will have to be a frequently updated post. Let’s start with the seemingly damaging Irish Times story that Anglo lobbied Central Bank director and Druid’s Glen diner Alan Gray the day before the guarantee –
Anglo had sought a €1.5 billion short-term loan from the Central Bank, which had not yet made a decision on the request. It is understood that the bank approached Mr Gray in the belief that he would make representations to the Government to intervene to prevent the bank running out of cash.
Something important to note: the option of a Central Bank loan to Anglo — Emergency Lending Assistance — was a better option that the guarantee. It would have kept Anglo in business long enough to get a better look at its books before the government tied itself irrevocably to it. The fact is, even now, we still don’t know where the final push for the guarantee over more moderate options came from.
There will be a lot to disentangle over the coming days.
I am open to persuasion, but for now I am deeply unumpressed by the notion that there is anything damaging about the “revelation” (it is as yet unverified) Gray/Drumm/FitzPatrick meeting. On the face of it, it is less damaging by far than the Druids Glen revelation (verified).
Indeed, if such a meeting took place and with the alleged purpose, it rather subverts the widely prevalent consensus – not shared by me – that Cowen, almost on his own, was conspiring with his Anglo pals from a long way back to rescue that bank without any regard for the disaster he was bringing to us all, and that his plan was implemented on 28 September 2008.
If that were indeed the case, why would the Gray meeting have taken place ?
Fergus: -” that Cowen, almost on his own, was conspiring with his Anglo pals from a long way back to rescue that bank without any regard for the disaster he was bringing to us all, and that his plan was implemented on 28 September 2008.”
Mr Cowen still (up to last week at any rate) maintains two things, one that the collapse of the banks was unforeseen and two that he immediatley on the collapse being made public had the solution and it was “the only game in town” despite the the fact that he had no legal obligation or right to make the taxpayer liable for debts already incurred without prior knowledge or consent written in law.
@EddieL
I suspect that when you refer to making “the taxpayer liable for debts already incurred”, you have in mind the so-called junior subordinated bonds, on which a rather high interest-rate was being paid by the banks in exchange for repayment being less secure.
The failure to satisfactorily impose “burden-sharing” on the holders of those bonds is not something that I am going to defend. However, I will say that the Irish government, from what we now know, not only had a legal issue to address if it wished to “burn the bondholders”, but was under – and *is* under – extreme pressure from the EU institutions not to do so (or at least not yet). In the light of the latter, it is, not totally, but a tad academic to speculate about Cowen’s possible other motives.
It is a little (again, not totally) beside the point for another reason as well. I do not have the figures to hand, but the amount owed to the [junior] bondholders is only a relatively small fraction of, to use your words, the total “debts already incurred” for which Cowen & his government “had no legal obligation or right to make the taxpayer liable without prior knowledge or consent written in law”.
The vast majority of those “debts already incurred” were owed to the people who had money in current and deposit accounts. Had the government done nothing – which appears to be what the current position of David McWilliams and other at least semi-respectable commentators would prescribe – a large portion of those account-holders would have suffered losses.
A case can be made for that, but do *you* wish to adopt that position ?
Fergus: Eamonn OCaoimh on the radio this morning mentioned only depositors as a state liability. He said the sum for each was €100,000 but I think it had not been raised from €20,000 at the time the liability was incurred.
It is my contention that Mr Cowen had no legal authority to incur state liability for debts not covered by law prior to the debt being incurred.
To give an analogy. If I borrowed money and squandered it I could not then maintain that a third party with no involvement should relieve me of my responsibility to repay the debt.
It would appear then that Mr Cowen had only legal authority to indemnify depositors to the tune of €20,000 and then only when the bank was dissolved and therefore there being no other means of depositors being reimbursed. It would appear that investors in the bank had no rights other than those of shareholders and we know that it was not the first time shareholders lost money. Leihmann Bros in America were allowed to under. I never heard that in this case investors or bondholders were reimbursed for their losses. Why would Anglo be any different?
@eddiel
“If [Anglo]borrowed money and squandered it [Anglo] could not then maintain that [the State] should relieve [it] of [its] responsibility to repay the debt.”
That is an argument against the State guaranteeing *anyone* – shareholders, bondholders, depositors (large & small) and current account holders.
It has a certain merit, but do you realise the consequence ?
Anglo’s owners i.e. the shareholders pre-2009 have, by law, no liability beyond what they invested, 100% of which they have lost.
Who, then, has the “responsibility to repay the debt” owed to the rest ? Even if you treat the bondholders as if they were shareholders, the other amounts owed will not be recovered from the bank’s borrowers.
As a taxpayer, I am not happy that the answer chosen is to place the burden on me, but who else is there ?
@eddiel
Cowen’s legal authority is the same as the one that ordains collection of taxes from me and payment of wages to nurses: an Act of the Oireachtas. Notably, Sinn Féin’s representatives supported with their votes the Act that guarantees the liabilities of the Banks.
@eddiel
During the Great Depression, huge numbers of banks failed in the U.S.. As far as I am aware, none failed here or in the UK. Certainly, if it did happen here, it was on a very minor scale by comparison.
The U.S. policy response included the setting up of the Federal Deposit Insurance Corporation (“FDIC”), which was given wide-sweeping powers to protect bank account holders. Very briefly, that is why you never hear about how the losses of bondholders over there. (Actually, you *can* hear if you listen for long enough: see e.g. http://bit.ly/dFXcJD – search that site using the term “Bair”).
Since the ’30s, buyers of U.S. shares or bonds, as well as employees of, and suppliers of goods and services to all banks, know that at the first whiff of a risk to deposit safety, the FDIC can “burn” everyone “just like that”.
That regime has its own problems – see the Bronte blog to which I have referred parenthetically in the penultimate paragraph – but its virtues are clear, too.
Ireland, forgiveably IMHO, never saw the need for such a regime,and that is one reason that “we are where we are”.
Fergus: It is a basic legal principle that the Law has to precede an event. To put it another way either the Law has to cover an event when it happens or it doesn’t there is no legal redress. Otherwise it would like submitting a Lotto ticket for a draw that has already taken place, something Mr Cowen seems to think he is entitled to do.
You say “The U.S. policy response included the setting up of the Federal Deposit Insurance Corporation (“FDIC”), which was given wide-sweeping powers to protect bank account holders.” There is your answer. Why did the banks here have no insurance. If you did not insure your house and it burned should the State rebuild your house for you free while everyone else pays their insurance?
“That is an argument against the State guaranteeing *anyone* – shareholders, bondholders, depositors (large & small) and current account holders.” Why then were depositors alone covered by the State (to a max of €20,000) prior ro the event of the collapse of Anglo.
To put it simply in this case Mr Cowen took it purely on himself on a whim with no legal obligation to guarantee shareholders and bondholders in Anglo. In other words Mr Cowen used public purse purely for his own purposes. If he did it because he liked to be flathúil with taxpayers money is purely academic.
In other times and places, before the masters of spin, this would have been regarded as ………. Did you hear Shane Ross on RTE last night refer to corruption in modern Irish public life? What was he referring to?
@eddieL
I don’t like justifying the actions of Brian political-dead-man-walking Cowen, but it helps no-one to misunderstand what actually happened.
You say:
“Mr Cowen took it purely on himself on a whim with no legal obligation to guarantee shareholders and bondholders in Anglo. In other words Mr Cowen used public purse purely for his own purposes.”
Nobody is arguing that Cowen had a legal obligation to introduce the guarantee.
However, he did not take “it purely on himself”: he proposed it to the Oireachtas, and everyone, I think, except the Labour Party, voted to do it.
Given that this is indisputably what actually occurred, it is ludicrous to suggest that Cowen acting alone “used public purse purely for his own purposes”.
What were “his own purposes” anyway ?
It is now clear that bailing out Anglo (except for €20,000 max to each depositor) had no legal status. Mr Cowen, aided by Mr Linehan, had primary responsibility in proposing and carrying out this act. Those who supported this course of action also bear responsibility and it shows the failure of our political system that we elect brainless party members who follow like sheep.
Why did Mr Cowen decide to make the taxpayer liable for the debts of Anglo when he had no legal obligation or backing to do so? I presume that eventually we will have a tribunal to decide.
It just shows how successful spin and propaganda have been that this mad idea got off the ground at all in the first place. I would like to think that it would not have happened in my day.