Documents Relating to Bank Guarantee

The Oireachtas Public Accounts Committee has placed a number of documents online that were given to it by the Department of Finance in relation to the government’s deliberations prior to its decision to issue a guarantee on the liabilities of the Irish banks in September 2008. The documents can be found here. Section A has the most relevant but there’s also some interesting stuff in Section B, which has material from a joint Finance\Central Bank Standing Group on Financial Stability.

Update: There’s a lot of material in the documents and I haven’t looked at it all. However, thus far, my impression is that while the documents are useful in shedding light on the extent of the government’s lack of understanding of the scale of the solvency problem in the banks, they are not very useful in explaining why the government decided to issue such a blanket guarantee.

Take a look at document 5 from part A. This contains notes from a meeting on Friday September 26 involving the Minister for Finance and representatives from the Central Bank, Financial Regulator, Department of Finance and the government’s advisers, Merrill Lynch. The notes state: “On a blanket guarantee for all banks — ML felt could be a mistake and hit national rating and allow poorer banks to continue.”

Moving on a couple of days to document 3 from part A, a blanket guarantee is one of the options presented to the government by Merrill Lynch on Sunday, September 28. However, the note questions the credibility of this approach, again mentions the implications for sovereign debt ratings and also points to a negative reaction for other European countries. The document is a bit inconclusive but the blanket guarantee still does not appear to be the preferred option of the govenment’s advisers.

Then on September 29, the government decided to introduce an almost-blanket guarantee. These documents do not make it clear why this decision was taken.

32 thoughts on “Documents Relating to Bank Guarantee”

  1. Bit late in the day now isn’t it? Two inquiries. Dozens of billions committed to dead institutions. The average taxpayer and pensioner being ‘water-boarded’ by the government every other day to pay other people’s bills. And still we have no prosecutions of any major players. Forget the Smart Economy. Welcome to the Cute Hoor Economy.

  2. Item 2 page 2 and Item 6 both refer to Anglo having losses of 7.5bn to 8.5bn in a stress case. This would have meant it was insolvent on the night of the guarantee, Yet why was it allowed continue as a going concern.

    Ok, maye the tax payer would have ended up holding the can as haircutting seniors was never practical. However, there was 700m spent on buying back subbies that should never have been done

  3. @tull
    Indeed. Mr. Whelan is not the only one who has been banging on about it either. It has been clear for some time that the banks have been flushing real cash down the toilet to make notional accounting figures look better. Cui bono? Who owned the sub-debt that was bought back…

    On the rest of the documents – it appears that the spin that the government sought the best available advice was correct and the advice understated both the risks and the consequences. However, it is also clear that the government ignored what element of risk and consequence were raised. There was an attempt to bluff their way out of trouble (without considering what upping the ante could result in) and it has failed disastrously.

  4. The govt had conflicting advice from its advisers. In the press this morning, the spin is that Mr Neary told the govt that Anglo had a liquidity but not a solvency problem. If that was the extent of the advice, it would be understandable to bring in a blanket guarantee because the risk of it ever being called would be low. The politician would be thus absolved of any blame.

    However, this turns out not to be a full a/c of the actual situation. Merrill on page 2 refer to a 7.5bn loss in Anglo on a stress test. This was the govt professional adviser telling them this. It ought to have carried a lot of weight. Indeed the evidence in the 25/09 memo is that D Doyle gave it a lot of weight.

    It would be reasonable to think that the Taoiseach and Minister for Finance would have considered this in the run up to the guarantee. They blew it.

    It is possible, that if the listened to Merrill (their trusted external adviser) they might have framed the guarantee in a lower risk format. It is possible that they could have gone down a different rout with Anglo. It is unlikely that the 22bn losses could have been laid off on someone else. To do that you would have had to have stopped Anglo spinning out of control in the first place. That traces back to earlier disasterous mistakes in regulation.

  5. Someone somewhere along the line must have pointed out the guaranteeing existing bonds was not necessary. A guarantee for new bonds/roll-overs yes, but not existing. Redacted, on doubt.

  6. @Ahura,

    Would this have had any impact on the contingent liability borne by the State? There was no water-tight bank resolution process in place then to enforce losses (other than those being imposed by the market on shareholders) on anyone other than the taxpayer; nor is there now.

  7. @tull macadoo

    Mr Cowen was Minister for Finance for much of the period leading up the the night the nation’s future was mortgaged. There is no escaping this fact. So whatever he was or was not told, Mr Cowen had held the brief long enough to form his own judgment about the condition of the banks and their assets. It would be remarkable if an ex-MoF did not retain some grasp of the exposure of banks to particular sectors. Indeed, the NTMA had pulled their deposits out of Anglo in and around January 2007 if my memory is right. Surly that must have bubbled up in DoF in-trays?

  8. Don’t forget that the government also claimed that Anglo was solvent as they nationalised it a few months later.

  9. @Paul Hunt
    “Would this have had any impact on the contingent liability borne by the State? There was no water-tight bank resolution process in place then to enforce losses (other than those being imposed by the market on shareholders) on anyone other than the taxpayer; nor is there now.”
    There was no guarantee in place either. Where there’s a will…

    The lack of a resolution process yet being implemented continues to be astonishing. I am more astonisheder by the day…

    So, what benefit to not having a resolution process?

    @Frank Galton
    They may have claimed that, but it is clear from the documents that a plan for nationalisation of Anglo and INBS had been prepared. Indeed, some of the documents are just for this purpose (e.g. the Q&A with the answers for DoF staff all laid out…).

  10. Merrill also advised that it was a liquidity crisis and that the banks were well capitalised.

  11. @hoganmahew,

    Thank you. And as to..
    “So, what benefit to not having a resolution process?”..I think the answer should be clear.

    If one were in place there would be a requirement to use it and the Government doesn’t want to be placed in that position while Anglo and INBS remain unresolved – and with AIB awaiting the results of the EU stress test. I’m not sure when a result is expected, but DG COMP (presumably in consultation with DG ECFIN and others) will pronounce eventually on the revised Anglo (and INBS?) restructuring plans. I understand the Taoiseach has committed the state to shore up AIB.

    I’m sure that, once all the puppies are back in their kennels being nursed back to full, agressive health at consumers’ and taxpayers’ expense, some consideration will be given to a bank resolution scheme.

  12. Document 5 (ML advice)

    “Management teams tend to try to play out to the end, because Government intervention tends to change the team, the advisers etc – their incentive is therefore to be over optimistic.”

    (ML?) “Presented a central scenario as follows

    (a) Provide liquidity on penal terms – must not be easy money
    (b) intervention

    Dangers with blanket guarantee – credibility and prolonging of weak institutions”

    And Brian Cowen just wrote another blank cheque to AIB.

    Happy days.

  13. Karl,
    Document 4, the presentation by Merrill Lynch on Friday the 26th outlines the arguments for and against each of the 4 strategic options. With respect to the guarantee, it notes that it was the “best/most decisive/most impactful from market perspective”. Under the heading of considerations, it notes “Irish Nationwide/Anglo Irish to be taken into state control”. Interesting!

  14. @ Gavin S

    not neccessarily true…see p2 of document 2 and document 6. Both refer to 7.5bn -8.5bn losses at Anglo if a stress test was applied. Since Anglo equity was around 4bn it was thus insolvent under a stress scenario. Merrill central case might have been solvency but there were other possibilities. These appear to have been ignored in the rush to guarantee.

    That said, I cannot see any circumstance under which a good deal of the losses in excess of the equity & sub debt buffer would not have come onto the taxpayer’s tab. Senior debt was never going to be haircut at that time.

    The Anglo looses were made possible by poor regulation. There is a degree of political culpability for this which rests with the 2002-07 govt.

  15. Can someone break down this €25bn cost of saving the banks that the Minister for Finance used today and the ESRI used on Wednesday?

    Anglo: 4+8.3+2+ (6 in the future)= 20.3

    INBS: 2.7

    EBS: €350m so far

    Thats €23.35bn

    Is that the way we are calculating it?

    Assuming we get our return back from BOI and AIB eventually (The €6.5bn).

  16. Hi Tull

    I agree but read the top paragraph on the e-mail in document 3 sent on the 29th September where they say all the Irish banks are profitable and well capitalised but are suffering liquidity problems.
    I am just pointing out that the blame for all this can’t be laid soley at the door of politicians. It is obvious that no-one had a clue what was going on at the time and the blame for that lies solely with the banks themselves and the regulator.
    Merrill itself doesn’t make a compelling argument against the blanket guarantee just like the Government doesn’t make a compelling argument in favour of it. Like ML said, there probably was no right or wrong answer.

  17. Rob S

    “Anglo: 4+8.3+2+ (6 in the future)= 20.3”

    I think it’s €8bn in the future, not 6. And “in the future” is likely to be *partly* in the next week or 2 when Anglo transfers tranche 2 to NAMA and will incur €4-5bn of haircut on an estimated €8bn of loans.

    As Fr Ted would have realised “so this isn’t a film, this is in fact happening now”.

  18. @ Gavin S

    I dod not mean to lay the blame at the door of the pols in total. It just that Cowen and LEnihan had to choose between competing advisers. The put insufficient weight on the stress probability and too much weight on the probability that things were fine. So the dynamic duo blew it. Of the two, I would blame Cowen the most is political accountable for the regulatory shortcomings.

    The official side is a mess. DOF does seem to be partly aware of the possibility that Anglo might have been insolvent but the Financial Regulator and the Central Banks seem to be in la la land. They must have been on Prozac.

  19. @Tull

    I agree. Regulator and Central Bank were on something. I love the way they give out about irresponsible bankers pay and bonuses but Neary didn’t exactly walk away paying a heavy price for failing in his job either.

    I haven’t read the full documentation yet so I probably shouldn’t judge too soon.

  20. I think the whole sorry saga underlines the importance of ethics and accounting standards. And of having one consistent set of books in order to have the facts and make an objective decision.

    Looking back, one is left wondering who knew what about the various frauds that were being carried out in each institution and between institutions.
    And how “who knew what” and “does he know that when he tells me this” must have added immensely to the problem.

  21. I’m sorry but in all this Anglo is seen as leading AIB and BoI astray like some flashy thug stealing their virtue. This misses exactly how both of those Banks have viewed the Irish State.
    We are protecting Banks that actively ignore Irish problems if they can profit. The hell of the 20s, with the removal of any risk money. Remember that regardless of the Wars we were exporting to the UK all through WWI at premium prices.
    It was the same in the 50s. During the 80s, London via the Banks sucked the very marrow from the Irish State.
    And these idiots think that protecting the Banks is a Good. How and Why. All you Economists on this Blog seem to thing that it is a Baaaad thing that the banks hit the wall. But they are Limited. The debt they incurred halts there. Just why are we going to the idea that they have the liability of Lloyds. What’s with this.
    Further, if the Government enacts up to date Bankruptcy legislation that will protect its own Citizens. Then we might come out of this with something useful.

  22. @ rob s

    That is shocking. That is nothing more a sales pitch that they would have done up for one of their investor roadshows. Pure fluff.

  23. Advice was given on Anglo, relying on the management’s information on the status of the debt of €72bn.

    Anglo gave a presentation days after the Lehman collapse as if it was presenting to analysts on its earnings results.

    Did it occur to anyone to send in accountants to check the breakdown of the bulk of these loans, repayment performances and what would happen if the construction market ground to a halt?

    It could have taken a day or two to do the assessment.

    The loan to value ratio of 73% appears to have been spoof.

    It was hardly a black swan scenario at that stage that the construction sector was up the creek. The credit crunch had begun 13 months before.

  24. The question Karl asks is why was a blanket guarantee given, esp against ML advice.

    Oh I do hate how Noonan is making a meal of this. ML are not infallible. Would their alternative of emergency funding collateralised by what we now know to be dud assets (ML thought the assets were good) have worked out better? Has the blanket guarantee yet cost the taxpayer anything? – I have argued elsewhere in this space that it hasn’t.

    Has Ireland’s credit rating deteriorated to the extent feared by ML or is this more to do with the fiscal deficit?

    The most important piece of ML’s opinion IMHO is that it would have been an utter disaster to have allowed any of the banks go under (personally I think INBS could have been let go). So let us not think that if we had followed ML’s liquidity solution that we would now be free of Anglo, as Noonan is very disingenuously hinting

    Noonan criticises the government for “at the minimum pretending it was acting with the support of its advisors”. Would Noonan have preferred that on announcing the guarantee that the government publicly admitted that this was against the advice of ML?

    Cowan is right. The government made the substantially correct call. It could have been refined by excluding existing debt and subbies but this is all academic as there is no resolution facility to keep the banks open and default on existing bonds whilst guaranteeing new debt.

  25. @BW
    “Cowan is right. The government made the substantially correct call. It could have been refined by excluding existing debt and subbies but this is all academic as there is no resolution facility to keep the banks open and default on existing bonds whilst guaranteeing new debt.”

    Guaranteeing subordinated debt is inexcusable IMO.

    Guaranteeing existing senior debt added nothing to the stability of the banks at in September 08. If we had only guaranteed new debt the banks liquidity problem would have been solved, which was the issue at the time appartently.
    This would have allowed us the time and space to see how big the solvency issue was. And surely on seeing the size of the hole it would have been possible to introduce the necessary banking resolution legislation.

  26. Deputy Noonan has at least exposed Minister Lenihan as being economical with the truth.
    ” During the debate on the Guarantee, I challenged the Minister for Finance to state whether the Irish banks were facing not just a liquidity crisis but also a crisis of loan losses and solvency. The Minister replied that ‘that the central issue confronting the Government last Monday evening was the liquidity of the Irish banks, not the question of solvency’”

    Yet the Minister had a report from Merrill Lynch on his desk whip implied that Anglo was insolvent under a stress scenario. Come back from that.

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