David Murphy: Hindsight Says Guarantee the Right Option

On the day that we found out that, contrary to the mantra of “everything was done on the basis of the best possible advice” the Irish government failed to follow the expert advice it received from Merrill Lynch when it decided to introduce a blanket guarantee, the state broadcaster brought on David Murphy to explain the implications. Viewers of the Six-One news were treated to the following exchange:

Sharon ni Bheolain: So with the benefit of hindsight and knowing now what we do know particularly about the value of those assets underpinning the loans, can we say that the blanket guarantee was the wrong way to go or is that an oversimplification?

David Murphy: I think in hindsight the guarantee probably was the right way to go and that’s exactly the conclusion that Patrick Honohan came to in his recent reports on the banks. The question though is “did they guaranteed too much?” and they did include subordinated debt in the guarantee. That was something that Merrill Lynch warned against. Merrill Lynch did make a number of warnings about introducing the guarantee. It said that Europe won’t be happy and that was right. It said that there will be a negative knock-on consequence for borrowing money in financial markets and that was right too. But it looks as if the government probably did choose the right option finally.

David reckons Patrick Honohan says that with hindsight the guarantee issued was the right way go. Let me turn the microphone over to Governor Honohan:

the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State‘s potential share of the losses.

As I have discussed here before, Honohan’s arguments in favour of some sort of guarantee do not in any way mean his report backed the full blanket guarantee that was introduced. Rather than backing the guarantee with the benefit of hindsight, he opposes it even without this benefit!

So the only argument David Murphy can produce to defend the blanket guarantee is the claim that someone who opposed it (albeit in diplomatic language) was exactly in favour of it. Perhaps David had another argument and I have missed it.

More seriously, I heard An Taoiseach on the radio today defending the decision to introduce the blanket guarantee on the grounds that this was required to keep access to funding open for the Irish banks. Again, I’d defer to Governor Honohan, who argued in his report that the inclusion in the guarantee of existing long-term bonds “was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in.”

So, let’s recap. The government did not, in fact, follow the best possible advice that it paid for when introducing a blanket guarantee. Governor Honohan is not an advocate of blanket guarantees. And blanket guarantees are not necessary to deal with short-term liquidity problems.

Still, at least the government has David Murphy’s support.

51 replies on “David Murphy: Hindsight Says Guarantee the Right Option”

The other bizarre spectacle of the day is the new line on the 2010 Anglo/INBS money where various government representatives rush to confirm that “the markets” already knew it was up-front debt when all the spin about the promissory notes was that they would “ease the burden on the Exchequer”.

@ Frank

I don’t think you’ve quite yet fully captured the wonder of the magical promissory notes.

They can be up front debt or deferred payments, depending on who it is you’re looking to impress at that particular moment.

They can’t be used to capitalise nationalised banks because for that you need “real cash” or they can turn out to be the ideal, indeed, ingenious way to capitalise nationalised banks.

Truly a wonder of modern finance.

(Just realised I broke my promise not to write about promissory notes again …)

I see EBS have increased their SVR by another 0.6% today. Now 2.9% about ECB base rate. 0.65% tracker anyone? Anyone who takes a SVR loan from INBS is on a hiding to nothing…

The evidence appears to be that the guarantee has neither reduced the liquidity constraints nor shored up the solvency of the banks. As the solvency doesn’t appear to have been in immediate question by ML or anyone else (although GS indicated that INBS would not last and ML that Anglo would not either without immediate funding), the failure to resolve the liquidity issue is all the more damning.

SLS where are you? It would have been an immediate resolution with a likely profit for the state. It would have reduced the level of immediate spend. It would have enabled the banks to write down their losses over time by taking toxic waste at par at penal interest rates. The NTMA could then have borrowed on the commercial paper markets to provide the cash.

It doesn’t take hindsight to see this, the BoE SLS and the Cypriot version of the same were already in place. The mechanisms were widely publicised. It was even recommended on this site…

I should state upfront that I hate FF for their part in perpetuating 30 years troubles where I was brought up.

But on this guarantee thing they were absolutely right and that is with hindsight. The fact that they disregarded ML advice is immensely to their credit. Advisors advise. Governments execute. Can anyone seriously argue that ML’s preferred option of the government lending to Anglo on foot of its “assets” would have been preferable?

ML judged that the blanket guarantee would be very negative on a market who would perceive that a 500bn guarantee would not be credible. They were wrong. The markets bought the blanket guarantee. The liquidity crisis was solved.

@Karl Whelan
But even after the guarantee, there was no requirement to set up NAMA. An SLS and own bank resolution processes would have worked just nicely. So okay, I exaggerate a little.

You may be the last person in the world who is swallowing the “cheapest bailout ever” line. We should get you designated a national monument 😀

@ BW,

I am not sure the liquidity crisis was solved. The Irish banks have survived since then on ECB liquidity, rolling over short term funding and occasional access to term debt (mostly with the guarantee). NAMA may improve this but I am not sure many here will agree with this view.

The docs reveal a collossal failure to face up to the fact that solvency was the elephant in the room. We are only just facing up to this 24 months later.

It was apparant to senior civil servants in DOF that Anglo was possibly insolvent in late Sept 2008. Yet the govt acted as if this was a remote possibility.

This was a grevious error. the proper course of action would have been to remove the managment, appoint new management, nationalise Anglo, take full control and look at the options therafter. In the end the outcome might have been the same but at least the pols and the perm govt could have claimed they were proactive & did their best.

@ tull

Agree with most of that esp. that the outcome would have been much the same. Let us dispel once and for all that the government rejected a silver bullet ala Merill Lynch


hopefully more subtle than that. Govt had competing advice. The major acotrs chose the wrong option. Had they picked the other option, there might have been a better outcome. In any event, if you chose the wrong option you should lose your job.
I was predisposed to cutting Lenihan some slack but to state in the Dail that the issue facing the banks was one primarily of liquidity when one had a report that stated that the problenm child was insolvent was a gross eroor of judgement. He was either foolish or knavish and probably should go.

Not to pick on just David Murphy, I’d note that Sean Whelan on the 9 o’clock news just now didn’t do much better I’m afraid. He emphasised that the ML note doesn’t make a single recommendation but rather sets out options. True, but they were pretty clear that of the options considered, they didn’t like the blanket guarantee. And yet that was the one the government picked.

I was on gate painting duty today, so I had the pleasure to listen to lunchtime news on newstalk and radio 1. Both frank fahey and brian cowen seemed to begin with a statement that now the guarantee had been proved right etc… Snacks of a cunning plan by the spindoctors. Reminds me of those scientists that proved bubble bees can’t fly.

Yes they picked the blanket guarantee against ML advice, That has worked out oh so right, We should be praising the government’s insight in overriding its advice.

This is the problem of a media that can’t tell the difference between a guarantee and the guarantee. A guarantee that covered deposits up to some reasonable limit designed to stop a run on the banks and banks collapsing unnecessarily and in an uncontrolled and chaotic fashion was one thing, the specific guarantee that the government introduced in entirely another. You can support the principle of the first while not supporting the latter. It’s like decentralisation all over again, you could support some form of rational decentralisation while not supporting what Charlie McCreevy introduced but try and get some elements of the media to understand the difference was like telling a four year old about death. They sort of hear the words but the concept floats right over them.

@ BW

Define worked out
The liqudity situation of the Irish banks is still on a knife edge, so it did not do much to sorth that.
It did nothing for solvency
We lost 25bn to 35bn on Anglo, it did not prevent that.

It is hard to see how it succeeded.

I would love to know what Colm McCarthy was saying. Perhaps it reveals the 3rd secret of Fatima, who shot JFK or whether the Dubs will ever win an All Ireland

“ML judged that the blanket guarantee would be very negative on a market who would perceive that a 500bn guarantee would not be credible. They were wrong. The markets bought the blanket guarantee. The liquidity crisis was solved.”

So are you saying here that we can afford to cover guarantees of 500Bn. Sure with that kind of dosh in our back pockets we’ve little to worry us, and our credit rating should still be aaa!

“I would love to know what Colm McCarthy was saying.”
Eh, not like you to not get a joke/sarcastic comment…

I don’t for the life of me understand how there can be anything commercially sensitive in the documents at this stage, particularly in how they relate to Anglo and INBS. Indeed some of the redactions seem almost at random – the numbers in one of the ML presentations clearly state that they are taken from the banks annual reports… all available on the web…

This begs the question; in whose interest was the govt acting and why? or is it just total incompetence. I suspect the latter.

“Transcript of handwritten note of meeting with Financial Regulator, Merrill Lynch, Central Bank, PwC, Arthur Cox, Attorney General, Taoiseach, Department of Taoiseach, Minister for Finance, Department of Finance, NTMA, Goldman Sachs (for part) Thursday 25/09/2008(?)” ……D Doyle noted that the government would need “a good idea” of the potential loss exposures within Anglo and INBS – on some assumptions “Anglo(s loss) could be 8.5bn” …. and then there was these other great figures they had!
http://www.irishtimes.com/newspaper/breaking/2010/0506/breaking51.html?via=rel And these are the guys who remove chief executives and take aim at boards of directors? What about removing themselves? These people put in charge of out fiscal policies with the power to decide the future of the nation? Or, should that be, the power to make sure that the nation has no future. Absolutely frightening!

D Doyle, is obviously from the same “school of thought” as Mr. Lenihan himself.

@ colm mccarthy


You’re old enough to remember when [Expletive Deleted] entered the political lexicon!

@ all

It was almost 14 months since the onset of the international credit crunch; it was a year since the collapse of Northern Rock; Irish banks were on the ECB respirator and in Aug 2008, CBRE Ireland reported that the “commercial property investment market in Ireland is at a virtual standstill and substantial yield increases are needed to improve the situation, according to analysts.

We reported on Sept 18, 2008: “Panic gripped Wall Street on Wednesday; investors rushed to safety pushing the yield on three-month Treasury bills to levels not seen since World War II; the two remaining independent investment banks Goldman Sachs and Morgan Stanley came under siege; corporate borrowing costs jumped and fears mounted about the unregulated credit-default swaps market on more than $62 trillion in debt.”

Against that backdrop and with Anglo running out of money, using the Pareto 80: 20 rule, a glance at the status of the biggest borrowers, would have surely shown that the 3% estimated bad debts on the €72bn loan book was nonsense.

Besides for all the advances for the development land frenzy in 2005/2006 e.g. the Irish Glass Bottle site, could not be funded as cash was drying up for works in progress and demand had vaporised for completed projects.

3-month Euribor was over 5% and with the margin, servicing a €500m debt was costing at least €2.5m per month.

It appears that the mindset of the individuals involved in the decision making was in a Sept 2007 time warp.

They were all in denial and as for the top two officials of the Central Bank, believing the property debt-laden banks still had good shock absorption capacity, all I can charitably say is [Expletive Deleted] them.

A week after Ireland included existing bank debt in its State guarantee, Denmark issued a similar guarantee.

They were the only 2 countries, which provided such blanket guarantees.

There was a guarantee needed but the one issued wasn’t a ‘masterstroke.’

I think that Michael is on the right track. The key issue is that by late 2008 the Irish governing system was still wandering around in total ignorance – or denial – of the state of the Irish banks. The regulator was still saying that Anglo only had a temporary liquidity problem. The department of finance and the government seem to have known little more, or at least not been listening to people who knew more.

The simple fact that the guarantee decisions had to be taken so quickly is the primary ground on which the responsible people should be resigning. The fact that they also put an excessive guarantee in place should also be grounds for resignation. The fact that they’re spinning the story and mostly getting away with it should be grounds for resignations in RTE and other media outlets.

Of course, no-one will resign. Everyone will be fine. Someone else will pay.

Why was the managment team in Anglo left in place on the night of the guarantee when governemnt’s outside insiders believed it was insolvent?

Did anything happen in Anglo subsequent to the guarantee that exacerbated the situation?

honohans paper to the world bank ‘controlling the fiscal costs of banking crises’ spells out his views on the subject c. 99-2000′. and it firmly warns against things like blanket guarantees (and several other ‘solutions’), obviously when it happens at home you might change your mind, and the ability of a first world country to hold a guarantee is different than when a 2nd world country tries to do it, but the point remains that it is one of the most potentially expensive solutions available.

at the same time it is clear that some form of guarantee was supported, but the scope went to far, the effect on the liquidity of long term bonds is perhaps a little more complex, if long term bond holders believe they are not going to receive their capital back it can start to have serious knock on effects on short term liquidity, so the situation isn’t as dichotomous as @Karl W is making it out, although taking a crack at the blanket guarantee is fair, warranted and required you can’t start to compartmentalise fact as if one part (liquidity) can exist independent of another fact (confidence in said bank).

The fact the guarantee is still in place means its too early to use the word hindsight.

The guarantee is a potential liability. OK, some accountant is going to contradict this and say its not adding to the deflict …… tell that to people who gave personal guarantees to the banks….

I view this discussion as unhelpful as it discounts the serious danger the Irish nation is still in because of this guarantee. We are still in the middle of the crisis with the potential for very very serious liabilities until that guarantee is removed fully.

The greatest calamity to have come out of all this is that we are lumbered with Anglo. It dwarfs all other considerations. Is anyone here arguing that if we had followed ML’s advice and lent money to Anglo instead of guaranteeing its debts we would by now have cut loose from Anglo?

As to where this guarantee is going. By December AIB/BoI will have been recapitalised (in great part by taxpayers money) their dodgy assets will have been replaced by nice repo-able NAMA bonds. Thus the guarantee can stop for these two. Anglo, INBS and EBS will effectively be nationalised so ipso facto their liabilities are guaranteed. Now IL&P, that’s interesting as nuffin’ has happened since Sept 2008 to change its liquidity problems.

@Brian Woods II
Nationalizing a bank does not guarantee their liabilities.

All the money going into the banks is a result of the guarantee Brian you can’t separate the two.

@ DE

Exactly. you can’t separate the two. The primary decision that was made and ML entirely supported it was that none of the banks would be allowed go belly up. The guarantee or some version thereof followed from this decision not the other way round.

@Brian Woods
Not exactly, because it would have been possible to prevent any of the banks going belly up while at the same time the taxpayer didn’t have to accept almost 100% of the losses.


Might be straying a bit off topic. The issue here is that ML were against the blanket guarantee, they preferred conventional lending on the collateral of assets which they thought were sound but which, at least in the case of Anglo, are now known to be completely dud. ML were wrong. The blanket guarantee has not yet proved wrong and it only has a few months to go and it was not the cause of us bailing out Anglo.

This ML thing is one gigantic red herring.

@Brian Woods
I think problem is you see no consequences to the guarantee because it hasn’t been called in full.

The reality as I see is the guarantee means we have promised to make good any gap that arises between the banks assets and liabilities. Hence the recapitalization of Anglo and INBS which achieve nothing except allow the guaranteed bondholders to be repaid. These are a partial call on the guarantee IMO

@ DE

Going a bit around in circles. We could not let Anglo go bust, it had to be recapped by the taxpayer. This is not because of the guarantee given in Sept 08 but is an imperative in its own right and was fully endorsed by ML who very graphically set out how letting any bank go would have led to a banking and asset meltdown of horrendous proportions.


“So are you saying here that we can afford to cover guarantees of 500Bn. Sure with that kind of dosh in our back pockets we’ve little to worry us, and our credit rating should still be aaa!”

Take any insurance company. It guarantees to pay out on death/accident etc. a large sum of money. There is no way it has enough resources to honour these guarantees if they were all called in at once. Same thing with the blanket guarantee. There is no way the whole 500bn or anything near it would ever be called upon.

ML were naively wrong here. The markets did not say “that’s a bluff coz you don’t have 500bn”. Instead the markets assessed the probability weighted possibility of a call and they didn’t take too much fright.

It was a calculated risk by Lenny/Cowan to override ML and they were proved right.

@ Hugh Sheehy

‘I think that Michael is on the right track. The key issue is that by late 2008 the Irish governing system was still wandering around in total ignorance – or denial – of the state of the Irish banks’

What is the ‘Irish governing system’ and what part have banks played in it ?

We have have never succeeded in developing a modern manufacturing economy. Our most industrialised town, Belfast, was cut off by Partition. Much of the southern industrial base was a peripheral ‘tail’ of UK manufacturing, and was closed in the 1980s rationalisation. As in Greece, there were lots of votes, but not that much output, from creating state jobs.

Capital was attracted in, but the FDI sector remains an implant with little domestic linkages. It didn’t serve, over a 30 year period, to move us beyond our traditional dependence on property and the professions. It is hard to believe that it can do so at this stage, so we need to take a harder look at what passes for normal economic activity here.

It is we who have allowed our professions to game our state for their own narrow advantage. Our bankers’ gambling was fully sanctioned by the DoF and the Regulator, which are core agencies of our state. They sanctioned it because the professions, including auditiors, solicitors and other self-governing groups to whom they defer socially, were diving in. The politicians, not all from the governing party, conducted the orchestra of the wilfully deaf. We elected people of that type, so we have to live with the results.

Bigger, more broadly based economies may be able to recover from a severe stuffing. We are in trouble as sovereign entitly, because we have few, if any economic cards to play at this stage. Bluster and fudge may get us down the road towards the next election, but the guarantee weighs like a stone on sovereign spread and SME lending alike.

It looks like we were a lot farther back along the development road than we thought. Facing up to the crimes of the Church took so much energy that we couldn’t attend to the rot in our other institutions. Time to look at the foundations.

When I said “the Irish governing system” I meant regulator, CB, DoF, Cabinet, etc…….the responsible financial agencies and ministries. I didn’t mean anything deeper on this occasion.

However, given the scale of govt involvement in ramping up the boom and – apparently – in discouraging too much questioning of the boom or the banks, much of govt was involved and culpable.

@ paul quigley

This is interesting analysis.

A few miles west of Bandon, off the road to Clonakilty at Old Chapel, you will find the ruins of the Lisnegat Cotton Mill, on the road to Timoleague and Courtnmacsherry.

It had about 300 workers at the time of the Act of Union and economic historian, George 0’Brien commented: “In 1800, Bandon was a prosperous town but by 1851, it had become a hotbed for paupers.”

The Londonderry of the South lost its significant Allman’s distillery in the mid-1920’s because of American prohibition and it would take 40 years before a significant factory would open in the town.

Until the arrival of Intel, Henry Ford was responsible for the biggest FDI project in Ireland, which employed 7,000 at its peak in Cork in 1930.

I had thought that the Fords who had emigrated from Ballinascarthy near Clonakilty in 1847, were Catholic and somebody said the ‘e’ had been dropped from the name by a clerk on Ellis Island.

It did seem strange that a Protestant would have such a strong affection for his father’s homeland and it was downplayed.

Cork also had the Dunlop rubber factory , the Dutch-owned Verolme Cork Dockyard and Irish Steel.

However, these significant concerns in their time, did not spawn indigenous enterprises.

As for the professions, it is strange that in recent times, apart from banking, the biggest earnings bonanza has been for public tribunal lawyers investigating corruption – – simply a corrupt system investigating corruption.

When a multimillionaire lawyer claims the cost of a bar of Toblerone from the State, it would make one wonder about the imbalance between self-interest and common interest.

Henry Ford and Cork, Ireland

Methinks that someone’s advice was decisive on the night.

I always assumed that it came from the major stockbrokers – peddlers of senior and suobrdinated bonds.

But there is one piece of advice that is always redacted.

How influential was the AG, a man who led the biggest commercial action in the history of the state and eventually won in the SC while AG after getting a special dispensation to finish off that little bit of private work?


you insurance analogy is interesting but fatally flawed – you have fallen for the same mistake as the purveyors of sub-prime mortgage securities. The danger of a rash of defaulters was much higher than they realised because if things went wrong, a lot of people would default together.

The reason insurance companies survive is that there is not a close correlation between the various risks. If there is a hurricane in New Orleans, it does not affect San Francisco.

Unfortunately, the collapse of the Irish property bubble affected all the Irish banks to a greater (Anglo and AIB0 or lesser (IL&P) extent. So while a blanket guarantee of all EU banks by the EU might have worked, the blanket guarantee of the Irish banks by the Irish government was an extremely foolish move for the Irish government to make.

@ Michael H

Thanks for those fascinating bits of the story as to why we failed to develop a significant domestic industrial base. The ‘why we were so poor for so long’ narrative reads a little different now that the Celtic Tiger is extinct.

There will have to be a bit of revision, too in the various scholarly accounts of the Irish state. How did we overlook the reality that our core structures were hopelessly vulnerable to capture by vested interests ? Why were the opportunities for gaming and subverting democratic decision making processes not identified earlier ?

Some aspects of our civic society need more attention from the sociologists.
How much of our ‘corrruption’ is simply a reflection of persistance of extended family loyalties and demands ?
What is the responsibility of the self-governing professions in the preservation of a consensual social order ?
What have been the consequences, both good and bad, of our attachment to the cultural values of the US and the UK ?
How should a university play its part in defending decency, democracy and economic development ?

@Paul Quigley

The persistance of extended family loyalties is probably just a reflection of the samle scale of our state. Everyone knows everyone else – we are all related.

How may degrees of separation between Cllr. Joe Mellet of Swinford (“Up Mayo”) and Richard Bruton TD?.

@ Maurice

Small size is just one aspect of it. The problem also has its roots in our rural clan society. The Romans never got here, and we had no towns before the Norse arrived. Feudal relations were confined for centuries to the Pale, with the Wild Irish beyond. Later on we were saddled with a rackrented food production role for the Empire. Emigration did not cease with political independence, and local elites struggled for control of the professions, institutions and polity.

There has never been a phase where business and entrerprise took priority over family and property. Maybe we could have had it in the New Millenium, but old habits, and old notions of status and security, die hard in Ireland.

Again…one of the key things is to understand that many of the Irish political and government figures do not even see what they do as being corruption. They see it as “the way we do things”, and “sure we know him and can trust that he’ll do things the right way”. Ehm..no…it’s corruption.

The Irish system is corrupt to the core, albeit in a rather venial way. From media to political parties to church, to semi states, to local planning, etc.. As in many countries, the electorate is complicit to a high degree. If we wanted honest politicians who would uphold the rule of law, etc., we’d elect them. There is little evidence that the Irish electorate is interested in honest politicians. Try running for election on the basis that you’ll do the right thing, uphold justice, etc. Maybe family members would vote for you. People want someone who’ll maybe do a favour for them, someday.

Meantime, our corrupt politicians don’t have the bravura corruption of some other countries, for which we should probably be glad.

Can people suggest how they think the alternatives to the blanket guarantee would have played out?

What would have happened if a lesser guarantee had been put in place.

A lesser guarantee would appear to have been preferable although the market’s reaction would still be somewhat imponderable.

If we had a lesser guarantee and still had to nationalise Anglo then it appears we would have been caught for the bulk of the monies we were caught for.

The buy-backs of subordinated debt, misjudged or not, would probably have taken place as the rationale for them appeared to be to shore up capital positions of the banks rather than to reduce liabilities under the guarantee.

If we do exit the guarantee successfully then the additional liabilities it imposed may be avoided.

Should we attribute portion of our borrowing costs (which will not be avoided) to the guarantee or is that highly speculative?

We also need to consider how our guarantee has affected the europe-wide position. We were the first to teeter and we took the most dramatic action. Our over-reaction may have bought the rest of the EU the space it needed to get lesser guarantees together even though some say we forced them to go further than they wanted.

We certainly lived up to the EU-wide commitment to let no systemic bank fail. The Honohan report suggests that ANglo was indeed systemic.

David Murphy might point to para 1.25 of the Honohan report in his defence:

As regards the substance of the guarantee itself, it is hard to argue with the view that an extensive guarantee needed to be put in place, since all participants (rightly) felt that they faced the likely collapse of the Irish banking system within days in the absence of decisive immediate action. Given the hysterical state of global financial markets in those weeks, failure to avoid this outcome would have resulted in immediate and lasting damage to the economy and society. There would have been additional lost income and employment surely amounting, if it could be quantified, to tens of billions of euros. Nevertheless, the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State‘s potential share of the losses.”

I think that Michael is on the right track. The key issue is that by late 2008 the Irish governing system was still wandering around in total ignorance – or denial – of the state of the Irish banks. yeahhh

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