Happy Birthday to the Guarantee!

I think we’d be remiss if the blog failed to mark the one-year anniversary of our Bank Guarantee Scheme or, as I like to call it, the initiative formerly known as “the cheapest bailout in the world so far.”

Useful points for discussion might include whether the guarantee was a brilliant move that saved the country from ruin (as our small but dedicated band of Lenihan fans will most likely view it), whether it should have included Anglo Irish Bank, whether it should have included subordinated bonds, and whether it should have applied to all existing liabilities or been limited to deposits plus new bond issues.

41 replies on “Happy Birthday to the Guarantee!”

I’d love to have an explanation as to why dated subordinated bonds were included in the guarantee and why they are going to be included in the new guarantee.

The guarantee was one big parachute deployed by FF to provide the property buisness with the soft landing it did’nt deserve. Everything before hand equated to a frantic search for the ripcord,while everything afterwards equated to a bluffers excuse for having left a perfectly serviceable aircraft in the first place.

Market folklore, allegedly sourced from people present, has it that the fateful night of the guarantee witnessed a Lenihan-led proposal to nationalise Anglo. All/most bank executives present that night fully expected it to happen, given what everyone knew, even then. Cowen thumped the table and uttered those immortal words “no bank is going to be nationalised on my watch”. Puts subsequent events into some kind of context.

simpleton Says:
September 30th, 2009 at 7:08 am

“Cowen thumped the table and uttered those immortal words “no bank is going to be nationalised on my watch”.”

Not buying it simpleton.

Lenihan could have walked. As Minister of Finance he had more power in the situation than Cowen.

They’re in it together. Up to their necks.

I’m glad I didn’t have to make the decision!

It looks like nationalising Anglo would not have been much cheaper as we did that and we are still on the hook.

The big question for me is should Anglo have been let go to the wall with a limited guarantee for deposits. In general terms I would have seen AIB/BoI et al needing to raise finance to try to buy Anglo loans at distressed values to avoid borrowers from those banks, e.g. Zoe, going wallop and thereby crystallising huge losses for AIB/BoI et al. That of itself would not have been a bad outcome for developers or banks IF they could raise the finance. If they couldn’t then AIB/BoI et al would be seen as fatally wounded and would have to have been nationalised.

The idea that Brian Cowen was a loan voice against Nationalisation of Anglo is obviously spurious. The ECB only prvided unlimited liquidity after Lehmans. Perhaps somebody can clarify the sequence of events but it seems to me that the DoF could not be sure in Sept 2008 that a nationalised Anglo would have access to the unlimited liquidity subsequently made available by the ECB.

It is clear by the size of ECB deposits with Anglo that a Nationalised Anglo could not have survived without ECB assistance. Therefore, when assessing whether Anglo should have been Nationalised in Sept 2008, it is worth consiidering what assistance for such a move had already been made available by the ECB.

Surely legally if the government had nationalised Anglo/all the banks at then current market prices the State would only have been on the hook for the capital invested in the bank ie in the same position as if I, as an individual, had purchased all the shares in Anglo?
Or am I misunderstanding the realpolitik of the situation? Surely bondholders can recognise the concept of limited liability when it is the State who is the shareholder?

The real politik is that nobody was going to povide Anglo with funds unless they were guaranteed no matter who the shareholders were. Nationalisaing by taking over the funds and doing nothing else would not have kept Anglo afloat.

Therefore, although the Govt has limited liability they would have had to guarantee debts if they wanted to keep Anglo as a going concern for themoment so it could be wound down in an orderly manner without spreading its problems to the other banks through systemic groups of borrowers (SGBs 🙂 ).

Kind of unrelated but I see seasonalised unemployment seems to have stabilised – only up by 600 in September – is this indicative of greatly inceased emigration – or the fabled “green shoots”.

What do the experts on Irish economy think – I’m sure some will claim NAMA is already working its magic 🙂

The guarantee was an attempt to buy time. Everything this govt does is an attempt to buy time, there is no real desire to tackle the heart of the problem, overleveraged banks. Anglo changing it’s reporting calendar yesterday – another example of buying time. Three more months to wait before we get another insight into the rotten core of a broken bank that will cost us billions.


Would anglo not have had unlimited access to the ECB’s discount window in any event? (well up to their amount of eligible collateral)

Albeit this would have been at a higher rate. When did the ECB start accepting a wider range of collateral for their loans?

@ simpleton

You misquote our leader. I believe the exact words were “we are not “rhymes with ducking” nationalising Anglo”. So reports Pat Leahy in the SBP. Anglo was a systemically important bank with a viable future. 12 months later, it takes the EU to tell us th truth and recommend it be wound down/ That is after the government on our behalf have consigned 4billion to money heaven. It kind of puts the FAS embroglio in context. How many semi state CEOs could you pay off with 4 billion.

@ Zhou

had a look at the ecb annual report – looks like 8th of october was when they decided to narrow the bands to + – 50 basis points and give as much as was wanted at the weekly main refinancing rate. If Im reading it right, the next week they made the longer term refinaincing operations unlimited at fixed rate

looked at a press release there – looks like the 15th of october they announced the expansion of eligible collateral

How much were panic calls from Anglo to the Dept of Finance on Sept 29th, prompted by the reluctance of IL&P to provide a loan of €4bn by Sept 30th to dress up Anglo’s end of year figures?

Anglo had a very clear motive to suggest it was in danger of collapsing.

IL&P produced the funds within hours of the guarantee being agreed.

Was the banking system about to collapse on the morning of Sept 30th without the guarantee of liabilities?

The midnight decision meant the option of consulting the ECB wasn’t presumably available.

If anglo had an emergency funding problem – why not just borrow from the discount window – i mean as far as i understand it one of lehman’s big problems was that, as it was an investmant bank, it didnt have access to the fed’s discount window. For sure, anglo would have been on temporary life support, but it would have been able to meet its debts as they fell due, allowing for a decent chance of an orderly wind up. Combine this with a guarentee of all new borrowings by AIB and BOI and an across the board deposit guarntee and we might be in a better spot now.

Absolutely. I wasn’t at Farmleigh on that night but have it from 3 different people who were there that that was the narrative. The DOF had the nationalisation plan on the table.
I wonder why Zhou and Greg were so quick and strident in their responses, their denial of what we and the press know to be highly probable, if not true. I sniff an agenda maybe? The idea that Lenihan’s option was to resign in the face of Cowen’s opposition to nationalisation is risible. A principled resignation? gimme a break


Playing with ‘time’ is a large part of the response to financial crisis internationally. One TV commentator summed it up as ‘projecting today’s problems into the future so that we can somehow muddle through to its end’ ……….. Financial system losses, real or perceived, are socialised onto present and future citizen-taxpayes …. this is the ‘real moral hazard’. This time last year Lenihan was probably right – but serious error in following week in not nationalising, and gettting real information on, all Irish banks. Just what did the ECB advise at that time? As it looks as if Naa-Maa has sufficient political numbers – then more discussion here how to ‘tame’ this monster in ways that can find political support in the Dail – and more on how the credit union movement could be further supported so as to provide back-up to those everyday Joes and Joans who are taking everyday hits. & oversight, regulation and supervision etc

@ simpleton

Perhaps it is just that I find it impossible to believe that this was the decision of one man, Cowen.

I too read the piece which suggested that the DoF had nationalisation of Anglo on the table.

Maybe you are right. In which case this just gets worse and worse.

When I said Lenihan could have walked I did not mean to imply that he would have.

The threat would have been sufficient to bring Cowen to his senses.

But, you have your sources.

@ simpleton

You are right, we all know FF do not do resignations. Moreover, the DOF plan on the night probably envisaged nationalising anglo and winding it down. We are told the other banks did too. The equity and subbies would have been wiped out on the spot and the good bits (if any) of the loan book transferred to AIB/BOI. There would still have been a cost to the exchequer but it would have been reduced to a large degree.

Instead, the Taoiseach & the Cabinet bought the idea that it was still a going concern, injected money into it and allowed it plough on. The DOF is now admitting that this money is gone.

@ Greg,

You have to remember that Lenihan was an inexperienced Finance minister at the time while Cowen had held that portfolio since 2004 (?). If you were in MOF position you could be forgiven for not pushing too hard.
The account of these meetings is now in the public domain and has not been denied by anybody.

In time, when all the papers are revealed, the decision to let Anglo plough on will look foolish.

@ jl,

Fair enough.

It just makes the whole thing more freighting to me. The thought that Cowen could overrule the DoF, Lenihan and the expectations of AIB & BOI leaves me cold.

Talk about unchartered waters.

Do you have any links for the story?

@ jl,

Fair enough.

It just makes the whole thing more freighting to me. The thought that Cowen could overrule the DoF, Lenihan and the expectations of AIB & BOI leaves me cold.

Talk about unchartered waters.

Do you have any links for the story?

some of the media coverage of this fateful night highlight aib & boi being the key players that evening. So what was anglo doing that night? Had they resigned themselves to market forces, highly unlikely. They must have been fighting for their lives. The spin would suggest they were sipping cocoa rather than scrapping. Seems odd.

Is my mature recollection correct that Anglo’s Golden circle had their loans changed to non-recourse after this?

@ Observer

Thanks for the link. Hadn’t seen it before.

Apart from the insight on the night of the guarantee there is something which I had thought of but never raised and which does not seem to have had much coverage.

“This is the central point about the bailout of Anglo Irish, and one that has not received any attention: the only effect of a bailout is that the Irish taxpayer will make up the losses of Anglo Irish’s bondholders instead of the insurers who had already been paid to underwrite the risk.

Why it is necessary to transfer Anglo’s losses from the writers of Credit Default Swaps to the Irish taxpayer is something that the Government has not thought to justify.”

Were Anglo’s bonds covered by CDSs.?

Did Cowen or Lenihan determine if this was the case?

Are they covered as of now?


Thanks for the info. It appears those ECB supports weren’t there until a week or two later. If Anglo had come clean earlier we might have been able to get the ECB onside rather than being railroaded. One wonders about the question posed by Michael Hennigan.

Guaranteeing BoI and AIB but not Anglo would have caused the quickest run on Anglo imaginable.


Anonymous sources provided by a pseudonym? I know I am one to talk about pseudonyms but I don’t start saying I have sources! I don’t think it makes sense.

In any event, I said that it was spurious to say that Cowen was a lone voice against Nationalisation because clearly there were many cons to Nationalisation to be weighed up and everybody present would have been involved in the debate.

You don’t make a decision to ring the Finance Ministers of the biggest countries in the EU in the dead of night without having a reasoned position. Painting a picture of Cowen not even considering nationalisation (which is clearly the spin intended by alleging the expletive quote) and railroading the other people there is obvious nonsense.

Even if the quote was accurate it could have come towards the end of the meeting when matters had been weighed up and Cowen was confident that Nationalisation was not a viable option on the night. It is clear that the legislation to nationalise was drafted up post haste thereafter.

@ jl

“…Moreover, the DOF plan on the night probably envisaged nationalising anglo and winding it down. We are told the other banks did too. The equity and subbies would have been wiped out on the spot and the good bits (if any) of the loan book transferred to AIB/BOI. There would still have been a cost to the exchequer but it would have been reduced to a large degree…”

It all sounds so neat. Are you saying Anglo should have defaulted on senior debt? If not, what would have been the immediate cost to the State to cough up Senior debt or a portion of the shortfall?

Leaving senior debt aside, should the State have left depositors to swing? If not, what would have been the immediate cost to the State to honour deposits?

What would the consequences for the other banks have been if the State allowed senior debt and some deposits in Anglo to fall given that everybody knows we could not honour the guarantee if called in?

It’s a fair cop on the alleged sources. I’m sure that we all have good reasons for anonymity. Mostly, I would guess, we can speak without fear of retribution of one kind or another. This is a small town and some of us have day jobs without tenure. I hope anonymity does not spring from cowardice or a desire to make mischief.
I cannot be sure but my sense of what happened that night was that it was part planning part panic. The DOF had been aware of trouble for a while and had drawn up some contingencies. Events overtook that process and a bit of panic set in. To an extent, they were making it up as they went along. They were also having the wool pulled over their eyees by many (not all) bankers. They didn’t know who to trust or where the truth lay.
One of the many unsolved legacies of that night is the implicit permanent state guarantee that we have given to senior bond holders.


My anonymity certainly does not stem from a desire to cause mischief. I have a day job without tenure.

The panic, planning and trying to get a true picture all sound plausible but the alleged Cowen quote about Nationalisation is being peddled to paint a different picture (mixed metaphors or modern art?).

I think the senior debt problem will be resolved at an EU/ECB level. Hopefully pan European bank regulation will bring us down that road.

or, as I like to call it, the initiative formerly known as “the cheapest bailout in the world so far.”

actually, when all of the tallies are done and dusted we should come back and see which was cheaper – the bank guarantee/NAMA or the spiralling deficit caused by continued public spending & borrowing, it think a 10yr tally will have the guarantee recapture that crown of looking cheap in comparison!


Interesting, hadn’t seen that article.

All this unemplyed mortgages, car loans, credit cards, etc. ….. when’s that likely to hit the fan then? With what consequences?

That Morgan Kelly article quoted by Observer elicited quite a response in the Dail.

After the guarantee, Morgan Kelly said that on prime time the banks had loaned approx €110bn on property and that a typical crash in the USA gave rise to losses of about 20% meaning the banks were probably out about €10bn to €20bn (I know those figures don’t add up). Morgan Kelly dismissed Brendan Keenan’s point that the banks said it was about liquidity not bad loans. Morgan Kelly was, of course, right.

With that said, Morgan Kelly was still only predicting 20% losses on loans despite having previously predicted 50% to 80% drops in property values. With that noted, I find it strange that MK is so dismissive of NAMA which forces the banks to write down losses of in the region of 25% to 30% on a large portion fo their property loan book.

In retrospect all that talk of a “liquidity crisis” is kinda funny – its kinda quaint or something – so, you lent a shed load of money to people who aren’t going to pay you back and now you’re having problems borrowing money yoursef, how suprising!

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