John Gormley woke with a start at his Dublin home in Ringsend about 20 minutes
after midnight on Monday night. When the Green party leader opened his door,
he found a uniformed garda outside.
Unknown to Gormley, the mobile phone on his bedside table had run out of
battery power an hour or two earlier and efforts by senior government
officials to reach him had proven fruitless. As various unpalatable
scenarios crossed the environment minister’s mind, the garda asked him to
ring the taoiseach’s office urgently on an important matter of state.
The taoiseach was about to trigger a crisis management strategy that Gormley
had discussed with Brian Lenihan, the finance minister, twice in the
previous week. Cowen was putting his coalition partner on notice of the
single biggest decision their government had taken since being formed 15
months ago.
Five hours earlier, the House of Representatives in Washington had adjourned
in chaos and cross-floor recrimination as congressmen voted down a $700m
rescue package for America’s banking sector. The unexpected setback followed
a day of turmoil in European banking stocks, triggered by the
nationalisation of Bradford & Bingley in Britain and the giant Fortis
group in France and Belgium.
As the Iseq index of Irish shares fell 13%, Bank of Ireland was down 20%, four
points ahead of AIB; Irish Life & Permanent fell 38% and the really big
losers were Anglo Irish Bank, down a massive 46%.
The vote in Congress came after the close of European markets and sent the Dow
Jones into a tailspin so severe that the rest of the world was likely to be
dragged further into the vortex next day.
At the heart of government, concerns were mounting that Anglo Irish Bank might
not be able to open its doors for business by Wednesday. A small bank with a
profile far higher than its market presence, Anglo’s investors include Sean
Quinn, a 15% stakeholder whose businesses control up to 30% of the Irish
motor insurance market and 15% of the health insurance market.
Anglo Irish’s customers withdrew massive amounts of money on Monday, anything
up to €10 billion, according to some banking sources. Even this was not
enough to threaten the bank, but with its share price in freefall there was
a feeling in financial circles that Anglo Irish had, literally, been saved
by the bell that rang to end the day’s stock trading.
The fear now was that when the market opened on Tuesday, the bank’s share
price would fall further, leading to greater outflows of cash and a possible
collapse. If that happened the contagion could quickly spread to other Irish
institutions.
AIB and Bank of Ireland, the country’s biggest banks, were having problems of
their own. On Monday night they requested a meeting with the government.
“[They] made it clear to us that liquidity was drying up in the Irish bank
system,” Lenihan, explained later. “The maturity dates for the various loans
they need to fund their business were shortening all the time and reaching
dangerous levels of exposure in terms of time limits.”
The banks were running to the state looking for help, in the form of some sort
of guarantee. Luckily for them, the government had already figured out what
to do.
PREPARATION for what the Irish Independent’s headline writers branded Meltdown
Monday had been ticking over quietly for several weeks. A “banks’ monitoring
group” was set up in the Department of Finance in late August, comprising
senior officials from the Department of Finance, the Central Bank, the
Financial Regulator’s office and the National Treasury Management Agency.
To advise the group, the Department of Finance retained banking experts at
Arthur Cox, a large Dublin law firm, which assigned two of its partners,
William Johnston and Padraig O Riordain , to help draft alternative
strategies to match a number of scenarios that might unfold in the Irish
banking sector as the international crisis played out.
The monitoring group mapped out several options, including letting an
individual bank go to the wall, taking equity in or nationalising a troubled
bank, or implementing a sector-wide guarantee. There was no great appetite
for the final option in the Department of Finance and officials are known to
have cautioned Lenihan against the move in the lead-up to Meltdown Monday.
According to a number of senior government figures, last weekend’s bank
nationalisation moves in Europe triggered another round of meetings in
Merrion Street and in the Central Bank on Dame Street. Lenihan followed
their progress from a distance.
As the scale of the devastation emerged on Monday at the close of the markets,
the monitoring group was summoned to Government Buildings at 8pm to brief
the country’s most senior political figures. Cowen called in Lenihan; Dermot
McCarthy, secretary general at the taoiseach’s department; David Doyle,
secretary general at finance; John Hurley, governor of the Central Bank; Pat
Neary, the Financial Regulator, and Paul Gallagher, the attorney general.
This group met on and off for the next six hours as Cowen inched his way
towards a radical decision to give the Irish banking sector a government
guarantee worth €400 billion.
As they deliberated, the chief executives and chairmen of both AIB and Bank of
Ireland waited in Government Buildings to meet with Cowen and Lenihan. They
were finally granted an audience just before midnight. According to banking
sources, AIB and Bank of Ireland were initially opposed to a sector-wide
government guarantee and instead favoured the nationalisation of Anglo Irish
Bank. But Sean FitzPatrick, Anglo’s chairman, had already indicated a strong
desire to keep his bank independent.
Meanwhile a number of high profile business figures were phoning Government
Buildings to press the case that Ireland’s financial system could not
survive a bank collapse.
While the big two banks had face-to-face meetings, government officials
contacted representatives of Anglo Irish, Irish Nationwide, Irish Life &
Permanent and the Educational Building Society by telephone, and later by
fax, as draft wordings of a statement for the following morning were
circulated.
Cowen finally spoke to Gormley at about 12.30am and the Green party leader
instantly gave his support to the sector-wide guarantee as his preferred
response. Gormley had discussed the option the previous Wednesday with
Lenihan after taking a call from David McWilliams, an economist and author,
who had pressed the need for a state guarantee of the sector. McWilliams had
suggested the same option to Lenihan two weeks earlier.
Between 1.30am and 2.30am, officials rang the rest of the cabinet at their
homes seeking their assent for the state guarantee. Nobody demurred. At 4am,
a senior Department of Finance official rang a senior colleague in the
office of Neelie Kroes, the competition commissioner, to inform them what
was planned. At 6am Lenihan, fresh from two hours’ sleep, was back at his
desk and calling Jean-Claude Juncker, the prime minister of Luxembourg and
currently head of the eurozone; Christine Lagarde, the French economics
minister and president of Ecofin; and then the leaders and finance
spokespeople of the main opposition parties.
At 6.45am on Tuesday, Ireland and Europe woke up to the news that the Irish
government was prepared to write a metaphorical blank cheque covering all
deposits in the six Irish financial institutions. Later in the Dail,
all-party support for the move looked attainable. Fine Gael indicated its
support in the national interest and it was followed, surprisingly, by Sinn
Fein, which is keen to show a more moderate approach to economic affairs.
Labour cavilled, however, and demanded a series of populist conditions, much
as Democratic politicians in American asked for a cap on top banking
executives’ pay.
As the parties called for further detail, Pat Carey, the government chief
whip, indicated that the Credit Institutions (Financial Support) bill would
be available at 4.30pm. Then it was promised for 6pm, 7.30pm, 9pm. Three
times the Dail convened and adjourned in confusion as the attorney general
and his team sorted out the complexities of financial instruments and
competition law. “I have been a long time in this House and I have never
witnessed such chaos before,” said Labour’s Emmet Stagg.
By 9pm, the fragile opposition goodwill was at breaking point. TDs were given
a “draft copy” of the legislation, but a final copy would not be available
until 9.45pm, Carey explained to gasps of incredulity.
The government was still insisting on pressing the bill through both the Dail
and Seanad that night, and the opposition sensed a guillotine would snuff
out any real debate on what Eamon Gilmore, the Labour leader, described as
“probably the most serious matter that will arise during the lifetime of
this Dail”.
He warned: “We could find ourselves at 7am or 8am with the news headlines both
here and in other capitals relaying the news that the Irish parliament has
not yet agreed the financial rescue bill for the banks.” The bitter
recriminations in the US House of Representatives just 24 hours earlier were
fresh in everyone’s minds.
What TDs and senators were being asked to do was to give Lenihan the power to
take shares in a bank and even, as many suspect he will eventually have to
do, oblige any combination of financial institutions to merge with or take
over another institution. Section Five of the bill gave him sweeping powers
to make regulations “to do anything that appears necessary or expedient to
bring this act into operation”.
Lucinda Creighton, a Fine Gael TD, hyperbolically described the powers as
“akin to those seen in 1930s Germany”. John Paul Phelan, a Fine Gael
senator, probably put it better when he said the powers were “unprecedented”
and expressed the hope that the minister “would use them correctly”.
Deputies queued up to bash the banks before passing the bill. Paul Gogarty, a
Green TD, said he was reluctantly supporting the deal but referred to some
bankers as “scum”. Michael Ring, a Fine Gael TD, suggested the most reckless
bankers should be put in jail.
Enda Kenny, the Fine Gael leader, said he had been informed that significant
funds were flowing out of Ulster Bank, which is owned by Royal Bank of
Scotland and was therefore not being covered by the guarantee.
One Fianna Fail deputy privately revealed that he’d had a phone call from a
constituent who held substantial funds in an account in his local Ulster
Bank. On Tuesday morning, he’d been e-mailed by another bank in his town
inviting him to move his savings over and enjoy the reassurance of their
freshly-minted state guarantee.
Ulster Bank was furious at being left out, and there were suggestions that it
might take legal action against the government under competition law unless
it was included in the scheme. On Wednesday, Lenihan did indicate that he
will consider including in the guarantee other banks with a significant main
street retail presence in Ireland. One government official said Ulster
Bank’s inclusion would extend the state’s exposure under the guarantee from
€400 billion to €460 billion .
As he oversaw the legislation through an all-night session of the Seanad on
Wednesday, Lenihan tried to stop parliamentarians calling the deal a
bail-out. “I do not want to hear the verb ‘bail’ again because it is not
accurate. The legislation is clear that the guarantee must be paid for and I
will insist the banks pay the correct charge.”
ONCE the legislation was safely through on Thursday, Lenihan was able to bask
in the glow of unprecedented political and media approval. But there was no
such warm welcome for his actions internationally.
Alistair Darling, Britain’s chancellor, spoke to the Irish finance minister by
phone on Tuesday and Wednesday. Why hadn’t he been told? Why was there no
consultation with other EU states? Lenihan explained that there had been no
time.
Gordon Brown also expressed his displeasure at Ireland’s solo run. But the
Irish political establishment pointed out that when it came to supporting
Northern Rock, the British prime minister did not worry about Irish concerns
when he gave it the first state guarantee of the current crisis in Europe.
In a thinly-veiled reference to Ireland, Kroes asked EU countries to work with
her and “pick up the phone” before they took action to support their banks.
A spokesman pointedly remarked that Brussels had heard from the Germans,
British, Belgians and from Luxembourg, but had no “formal” notification from
Ireland, and it was impossible to see if the €400 billion guarantee met EU
competition rules without any details from the Irish.
But one Department of Finance official said: “You have to be very careful
about what you say in the middle of a banking crisis. The first priority was
to protect the interests of the Irish state, and banks being starved of
liquidity is clearly not in the interest of the Irish state.”
Lenihan expressed a similar view in the Seanad when he said: “At the end of
the day, there are six banks that would be orphaned without us. Europe was
not prepared to adopt them. Therefore we had to take decisions.” Looking
ahead to EU plans to examine the Irish guarantee, he said it was “well
established in EU law that when there is a threat of systemic disturbance to
a whole national economy, a member state is entitled to take action”.
Once the legislation was in place, government attention immediately returned
to the budget on October 14. The banking crisis had absorbed a huge amount
of government attention close to another crucial fiscal event. Cowen ordered
two further special cabinet meetings — one on Thursday and another yesterday
— to get budget business back on track.
Exchequer returns released on Thursday revealed that the fall-off in tax
revenues is still accelerating at an alarming rate. In essence, they were
down €1.5 billion in the first six months. The state lost another €2 billion
in tax revenue in the following three months. Now they’re expecting to lose
€3 billion in the final quarter.
With an €11.5 billion end-of-year government deficit looming, there is a
niggling doubt that the reason for last week’s guarantee was simply that an
individual bank bail-out would have been too costly. Of course the guarantee
could come at a high cost, too. But if it doesn’t, Cowen and Lenihan will be
left with bragging rights that will see them out to the end of their
political careers.
Additional reporting by Brian Carey and Tom Lyons
Dark days
How events unfolded Monday morning, September 29: Irish banking stocks
plummet. Anglo Irish Bank worst affected, down 42.6%.
Monday, 7:20pm: The US bailout collapses. The taoiseach and finance minister
call in senior officials to discuss “contingency plans”.
Monday, 10:00pm: Bank of Ireland and Allied Irish Bank teams arrive at the
Department of the Taoiseach.
Tuesday, September 30, 3am: A press release is finalised after ministers
contacted. Brian Lenihan, finance minister, leaves for home while officials
contact the EU commission.
Tuesday, 6am: Lenihan rings EU and opposition leaders. News of the bailout
breaks.
Tuesday, morning: Gordon Brown reportedly hears about it on the news. Alistair
Darling, British chancellor, rings Lenihan to say “the scheme was a problem
for the UK”.
Tuesday, afternoon: Deposits flow from British banks into Irish institutions.
Neelie Kroes, EU competition minister, issues a thinly veiled attack on the
plan.
Tuesday evening: “Member governments don’t have the luxury of waiting forever
in a day to . . . [decide on] critical matters,” Charlie McCreevey, internal
markets commissioner, retorts.
Wednesday, October 1: Lenihan signals that he will consider applications from
non-Irish-owned banks to be included in the guarantee scheme. A bill is
passed at 2am.
Thursday, 2am: The Seanad debate begins. The bill is passed at 8am.
System needs revamping
THE government’s guarantee does not address the underlying problem, writes
Moore McDowell. Will it be more costly than we are being told, and was
it adopted because the true cost will not appear when the budget is
presented on October 14?
We don’t know precisely what was disclosed to the government last Monday.
Rumours were rife about the poor state of some banks. In these
circumstances, it would have been irresponsible not to act.
However, doing anything is not necessarily better than doing nothing. The
remedy should reflect the problem. The guarantee makes sense if the problem
for Irish banks was a shortage of liquidity. That is, other Eurozone banks
would not lend to them because they had baseless fears about their solvency.
In this case, government underwriting the banks’ liabilities would work.
Suppose, however, the reluctance to lend was based on good information and
that it reflected a view that some Irish banks had insufficient capital to
cover “toxic” loans and support existing loan books.
I believe this was the reality. Some banks could not meet regulatory and
prudential requirements if they were to write off their “toxic” loans.
The collapse of one or more banks became possible. Bank credit to the economy
would be curtailed, so something had to be done. But a guarantee does
nothing about this, and will be very costly if it has to be called in once
the Irish banks try to offload their poor quality assets.
The government should have used exchequer funds to provide equity finance to
banks. Sweden did this in the 1990s. The exchequer should have supplied
equity capital, possibly €10-€15 billion, in return for shares. That would
have resolved the solvency issue.
The problem was the exchequer would incur an immediate cost. Given how
horrible the budgetary position is, further borrowing was unpalatable.
The guarantee means giving the banks a call option on funds. The taoiseach
said this would not cost the exchequer. True, it is not a cost until someone
has to write a cheque. But giving a call option without a defined limit is
very costly.
Moore McDowell is senior lecturer at the School of Economics in University
College Dublin
Never mind the quality of our loans, feel our pay packets
BEING at the wheel of the country’s financial system as it hurtled towards the
abyss was nice work if you could get it, writes Mark Paul. The 27 top
executive directors and chairmen of the six banks covered by the
government’s guarantee paid themselves more than €135m over the past five
years.
John Hurley, the governor of the Central Bank, who will be advising the
government on how to extract its pound of flesh in return for the €400
billion safety net, confirmed last Friday that executive pay is now a live
issue. Even Sean FitzPatrick, the chairman of Anglo Irish Bank, admitted
yesterday that the boardrooms of Irish banks will “have to take account of
the views of taxpayers like never before” to ensure “people are paid
appropriately and not excessively”. FitzPatrick would not have far to look
in the search for executive pay levels to trim. His bank accounts for €42m
of the €135m wages bill since 2003. The chief executive role, David Drumm’s
since 2005, has been the best-paid job in Irish banking over the past five
years. It has returned €14.6m in pay and bonuses since 2003, almost
two-thirds of it performance-related. FitzPatrick was paid €431,000 last
year for his non-executive role as Anglo chairman.
Brian Goggin, the chief executive of Bank of Ireland (BOI), is now top of the
jumbo pay packet stakes. In 2006, he collected €4m, excluding share options.
Perhaps in response to the media storm that greeted his 2006 salary details,
Goggin took a cut last year, to €3m. But his executive director colleagues
enjoyed hefty pay rises. In the past two years, the top five managers at BOI
have shared almost €20m. AIB represents something a little closer to value
for money, but the pay packet of Eugene Sheehy, its chief executive, has not
been below €2m since 2004.
Michael Fingleton, the chief executive of Irish Nationwide, is €7.5m richer
than he was in 2003, not including his hefty stake in the mutual. EBS
accounts for 6% of the salaries of Irish banking executive directors, and
Ted McGovern is the only chief executive yet to breach the €1m-a-year mark.
After last week, he can hardly fancy his chances of doing so any time soon.
