Gormley Update: Guarantee Decision Not Taken Over Weekend

After claiming on RTE radio last weekend that the guarantee decision was taken “on the day before. It was a Sunday. We had a Cabinet meeting. We’d gone through it in quite a bit of detail” John Gormley is now stating that this was not, in fact, the case. Today’s Irish Times reports:

Mr Gormley said in a statement that a meeting of the Government was held on Sunday, September 28th, to discuss the budget for 2009.

“At the end of this meeting, the Minister for Finance briefed colleagues on problems experienced by Irish banks in context of international developments; that contingency arrangements were being prepared; that the situation was being closely monitored, and that the focus was on banking system stability.

“While no formal decision was taken, arising from the briefing there was a clear understanding some Government action would have to be taken if the situation deteriorated,” Mr Gormley said.

So, we’ve gone from “you couldn’t just make a decision on the spur of the moment. You’d have to discuss it for days in advance. Of course, not. No, you just can’t do it like that.”  to “some action had to be taken” with the specific action that was taken being done as follows:

The further deterioration in the situation on that Monday led on to the discussions and decision on the night of Monday and Tuesday, September 29th and September 30th, 2008.

i.e. they took the decision when Gormley was in bed.

Personally, I think Gormley would be better off sticking with “Wasn’t my idea, I was in bed” as a political strategy. More seriously, for the circumstances of such a momentous decision to be so murky more than two years afterwards is highly unsatisfactory.

47 replies on “Gormley Update: Guarantee Decision Not Taken Over Weekend”

“Mature reflection” much, Mr. Gormley?

Pick one of the words not allowed on this site to describe him. Pick all of them…

Karl

To re-quote Gormley on Marian Finucane programme:
“The arrangements had been made the previous Sunday, right, and we had gone into that in quite a bit of detail and said yes this was the expert advice, to go down the guarantee route.”

We now know the “expert advice” it by way of a briefing from Minister of Finance.

Maybe Gormley was asleep at the Sunday meeting also. It cannot be easy to stay awake at these meetings! This might explain why he needed to go to bed for the next few days!!

@itslehmanswotdoneit: “Eh….so which lie is the truth?”

The lie that has been officially denied – aka. The Galloway Paradox!

BpW

From the SBP of Sept 27th 09…

“On Sunday, September 28, on the margins of a special cabinet meeting to prepare for the budget – brought forward to mid-October as an emergency measure – they had discussed the options for some sort of bank rescue with the leader of their coalition partners, John Gormley. The Green minister had been influenced by discussions he had with the economist and newspaper columnist David McWilliams.

In that day’s Sunday Business Post, McWilliams had argued forcefully for a bank guarantee, but only on deposits. Finance minister Lenihan had also spoken to McWilliams about the banks on a number of occasions in the previous weeks. He had also consulted the European Commissioner and former finance minister Charlie McCreevy.”

[snip]

“By that stage it was clear that Monday would be crucial. The falling share price wasn’t the principal problem – the banks had already lost some 80 per cent of the 2007 highs – but it was what the falls represented that was of concern to the ministers. The markets were anticipating that an Irish bank was going down, and that belief would sooner or later precipitate a run on one of them – possibly all of them.

No bank, however healthy, can survive a run on deposits. On the Monday, deposits left Anglo in droves and deposits in the others banks also started to trickle steadily outwards. The government felt it could not risk a bank collapse.”

http://www.thepost.ie/story/text/eyeygbcwmh/

My interpretation of that article’s references to this meeting is that it broadly reflects what Gormley has said both on Saturday morning and in his clarification. Yes, he handled it very, very badly, but I think it is reasonable to say that it’s more likely that he simply spoke clumsily on Saturday morning rather than anything more sinister.

Shortly after the guarntee was put in place I contacted Dan Boyle of tweet fame to say that I calculated that the guarnatee in the case of Anglo would probably cost the state of the order of 35 bn and this would lead to a major reduction in state services including education.

He replied saying that they had been told that anglo was “systemic” as it was a larger percentage of country GDP tied up with its balance sheet than Lehmans in the US.

When I subsquently questioned him why the guarantee had cost the state 6 bn for INBS where clearly the “systemic” arguement could not be used he failed to get back to me.

Obviously if you look at the current Green leadship there are major flaws, they pick what they like in the economic and environmental issues and try at all times to occupy the moral highground. They take any critisism hysterically and niavely like their frequent outbursts in the Dail have shown.

We need a mature green party. If the current leadership aren’t up to it they should stand aside.

A MacEadai,

On the subject of rewriting history the Sunday Business Post is not above such a thing itself when it comes to protecting its columnists.

It is not true to say that in September 2008 McWilliams said:

“In that day’s Sunday Business Post, McWilliams had argued forcefully for a bank guarantee, but only on deposits.”

What McWilliams in fact said was the following:

“The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else.”

The full article is here:

http://www.thepost.ie/archives/2008/0928/state-guarantees-can-avert-depression-36245.html

@ jules

“We need a mature green party. If the current leadership aren’t up to it they should stand aside.”

Would that be the type of Green Party which has “Mature Recollection” a la BL Snr. on a regular basis? Face to Camera, like?

When you are found out, pleading “Mature Recollection” will inevitably lead to your Political Annihilation, as we have seen.

The Greens will not need to “stand aside”, as you suggest. They will be pushed aside by the Electorate, very soon, never to re-emerge.

The pity is, these careerists have probably done irreversible damage in Ireland to the generally honourable International Green Movement.

@John Martin

Thanks for the clarification — I was puzzled too, because I had already read the McWilliams article and couldn’t remember anything about the proposed bank guarantee being ‘only on deposits’. It’s flabbergasting how people re-write or re-interpret their own past proposals and predictions to improve their self-image even when the evidence of what they actually said at the time is immediately accessible to everybody.

Thank heavens for online newspaper archives.

@ John Martin

Your point is well taken wrt McW, but I don’t think it detracts from the primary thrust of my post regarding Gormley’s comments.

@ John/Carolus

magnificent article – he thinks its a liquidity problem, thinks we should make a solo run with a blanket guarantee, and thinks that nationalising a bank would scare the markets. In particular i liked this line, written in a hyper-approvingly manner:

“In addition, the €150 billion owned by foreigners would simply become like an Irish government paper.”

Were mistakes made with the guarantee? God yes. But its disingenuous for some people to claim that they didn’t think it was a good, even great, idea at the time. Hindsight, such a wonderful thing.

@A. MacEadai:

Yes, [Gormley] handled it very, very badly, but I think it is reasonable to say that it’s more likely that he simply spoke clumsily on Saturday morning rather than anything more sinister.

.

Let’s be even more charitable and say that Gormley was ueberfordert [see Muenchau at FT yesterday] — out of his depth.

Remember that it was Gormley who pushed for the introduction of more stringent rental standards in 2009. The unintended result of such standards is to force Gormley’s preferences on others and indeed to make rent unaffordable for the very poor. Gormley doesn’t understand basic economics. Why expect him to understand high finance?

McW is only the same as Lendahand….. too smug when it mattered, irrelevant now. He’s full of the proverbial, but you have to hand it to him, he made a monumentally bad assessment, perhaps helped trigger the greatest fiscal collapse in history (and maybe worse) and yet he has managed to profit handsomely from it….

As far as the country goes, the damage has been done, the game’s over, just a question of who gets the last few lifejackets before the rest of the country realises we are following the same course as the Titanic

@ David O’Donnell

If Iceland had guaranteed the debts of their banks like we did, where would they be now? In your opinion.

Didn’t Ireland emerge from recession earlier in the year ? I thought that was a major plank of JTOs- Or was he the major plank ?

It must be a freak coincidence that he went off *to the US* just as the IMF were flying in, BTW.

@jarlath
“If Iceland had guaranteed the debts of their banks like we did….”

As far as I remember Iceland did in fact guarantee the banks but said it only applied to domestic depositors – which prompted the Brits to invoke anti-terrorist legislatio to stop them repatriating their funds. Then a referendum prevented them from repaying British and Dutch depositors and forced more fvourable renogiations which I understand means they will repay a lesser amount over a longish period. Sorry for the lack of detail maybe someone can supply those – otherwise I will have to resort to googling it myself.
But the poit is that guarantees can (and sometimes should ) be overturned in democracies.
I have already proposed that we have an icelandi type referendum on the subject and sort out the debate once and for all.

Isn’t the continuation of the guarantee now more important than the ineptitude/lack of alternative options that led to its introduction ?

@Jarlath

I think they would be in the long-boats raiding places like wexford and skibbereen (great white slaves in skibbereen) and aberdeen and riga and lorient and all the ways up the Danube ……. just like any self-respecting serf subject to unconscionable destitution they would obviously go BERSERKER …..

The Icelandics VOTED for a more pragmatic option …..

@ Richard Tol

To play devil’s advocate here, his comments were not unambiguous if they had indeed made decisions on the Sunday which were dependent upon possible happenings on the Monday. E.g. if (a) happens, then we should go with plan (x); if (b) happens then we should go with plan (y), etc.

Quite apart from whatever is the truth of the matter, one thing that most would agree on is that Gormley has handled this appallingly.

I suspect, like most or maybe all Ministers, he just didn’t understand what as going on.

If he did talk to McWilliams, it is also possible he was tooo flattered by the attention – at last – from ministers, and was too keen to be listened to than to be really thoughtful about what he was saying.

I doubt we even have the power to overturn the guarantee now. If we did want to. Those lads who will be checking our books every friday probably wouldnt let us. Otherwise, who do you then resort to if you’ve pissed off the lender of last resort

@ John Martin
You bet me to it! But nice spot.

From the SBP in SEP 2009
“The Green minister had been influenced by discussions he had with the economist and newspaper columnist David McWilliams.”

I hadnt read that before and if it is as reliable as the rest of the article I should perhaps take it with a pinch of salt but it does add weight to my “mad cap” theory that McWilliams was heavily involved in the Blanket Guarantee decision.

As far as I know he has never been called on it.

I would love to know how he regards his actions in hindsight.

There is no point in parsing John Gormley’s words.

Words mean nothing to a politician.

All those ministers who explicitly dismissed talk of a bailout still reckon they were telling the truth.

All we can do is judge them by their actions, and by the results of their actions.

The constant ‘reverse-ferrets’ are embarrassing and pathetic. But ultimately the legacy of the lot of them will rest on what they’ve actually done to the country.

We have power
We are just afraid of pissing people off that we will eventually will.
We will be forgiven if we do.

The bad stink coming from anglo irish was unmistakeable as early as 2003.

Yet Gormley was part of a government which issued an almost blanket guarantee on the liabilities of banks which they had not bothered to regulate and which they did not understand.

Now Gormley appears to be unsure whether he was involved in this decision or not.

It is hardly surprising that outsiders are running our affairs.

@ amcgrath

I think it is too late for a referendum, if we had done that before the boys from abroad arrived, then we could have called on them afterwards. I believe thats pretty much what Iceland did…”F**k you banks, you’re on your own, now does anyone have the number for the IMF?”…
But we’ve already called them in and given them the keys so i dont think we have scope now to renege on anything. The leash would be yanked pretty hard if we did. The only hope i see of us getting to wriggle out of some of this debt is if another EZ country finds a way to do it.

@ David O’Donnell

Berserker vikings it is so. I’ll get my longboat.

@ Eamonn Moran

For what it is worth I think McWilliams has always admitted advocating the guarantee, but insists it was a bluff and a strightforward lie, to be welched on at the first opportunity.

The participants who keep kicking the straw man that is McWilliams are fooling nobody – you’re only doing it so you can ignore those like Morgan Kelly and Dan O’Brien etc. who were loudly correct all the while.

For the nth time, nothing extraordinary happened , nothing unpredictable, no black swan.

@Jarlath
‘The only hope i see of us getting to wriggle out of some of this debt is if another EZ country finds a way to do it. ‘

Looks like they are working on it as reported in the Guardian-

‘The socialist government hopes an extension will dilute fears that Greece will have to restructure its debt when the bailout expires in 2013. In line with Ireland, Athens is expected to be given until 2024 to pay back the emergency aid without which it would not have averted bankruptcy after its borrowing costs soared earlier in the year.’

If we go this route it may solve the problem likely to arise in 2013

@ KARL

for the love of God man, would you not start up a new Budget thread so we can live blog on this???????????

@ Tim O Halloran

“For what it is worth I think McWilliams has always admitted advocating the guarantee, but insists it was a bluff and a strightforward lie, to be welched on at the first opportunity.”

Absolute Bull!

At the time he believed it was a maverick masterstroke that would draw huge levels of deposits into the country.
Only later when he realised it was a Solvency problem did he completely backtrack.

” The participants who keep kicking the straw man that is McWilliams are fooling nobody – you’re only doing it so you can ignore those like Morgan Kelly and Dan O’Brien etc. who were loudly correct all the while.”

Dan O Brien???

You Are completely missing my point.

My theory is basicly that McWilliams was acting in what he thought were the best interests of the country. But his actions were also maverick and dangerous. He was 100% wrong in his Diagnosis. He did not fully realise that the Guarantee he was proposing had huge longterm legal implications.

His calls later to just ignore the guarantee are spot on in my opinion, but he was backtracking on his own incorrect beliefs and in a conservative FF led government they would not be willing to do that. In fact I don’t think Labour or FG would either.

Once a legal guarantee was given, a legal guarantee was given.

The banks would have loved his idea. They knew what he didnt.
The Guarantee would be called on.

@Eamon Moran
The SBP article is actually ontradictory – early on he makes a comment to guarantee all “depositors/creditors and “excluding shareholders” but later he mentions only depositors and actually never specifically refers to bondholders.
It’s difficult to believev that he was as ignorant of banking at that time as myself and wouldn’t have known a bondholder if he jumped up and bit him – but rereading that article that is the definite impression that comes across.
Towrds the end of the article he says:
“‘‘The Irish government wants to protect the whole financial system, secure its stability and ensure that all deposits in Irish financial institutions are safe.”

The key here is ‘‘all deposits’’. If an Irish institution went bust, would depositors with more than €100,000 have the right to hold the government to its ‘‘all deposits’’ description in this press release?

If the crisis leads to any loss of deposits, you can bet the courts will be full of cases against the state.

The minister should simply state explicitly that the deposits are guaranteed and clear up any confusion.

Unfortunately, he is being advised by merchant bankers on the one hand, who are just interested in fees and don’t give a fiddlers about Ireland, and civil servants on the other, who can’t see that nationalising a bank is the biggest policy reversal since TK Whitaker.

He needs to be brave and visionary and see through the limitations of his advisers. Equally, the careers of everyone around that cabinet table will be blighted if the banks go under as a result of any nationalisation plans.”

I think the article is badly written and internally contradictory. The idea that it was the instigation of the legal guarantee is far-fetched in the extreme. For one thing he advovated a verbal guarantee only and not what they produced with it’s blather about irrevocablilty and unconditionality, and an incomprehensible failure to included a clause whereby it could be voided in cases where the beneficiaries lied misled or withheld material information. So I’m afraid DMcW cannot be used to let BLTD and BC off the hook

@AMcGrath
McWilliams is a talented writer and his column of September 2008 is well written.

He makes it very clear that all creditors except shareholders should be covered by the guarantee. There is no ambiguity in the relevant paragraph which he wrote:

“The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else.”

I don’t know how he could have been clearer.

In September 2008 the term “bondholder” had not entered the lexicon of the average SBP reader never mind the general public. This might explain why for most of the article he talks about depositors. But he never says “only depositors” should be covered by the guarantee.

I take your point about McWilliams saying Lenihan should make an “explicit statement”. But that is hardly a defence; only an indication of McWilliams’s naïve view of what constitutes a legal guarantee.

Of course, McWilliams cannot be held responsible for the Guarantee. That responsibility rests with the Government.

However, last night on Prime Time he was claiming that the Govt’s handling of the crisis was a text book example of how not to handle the crisis. Furthermore he denounced it for refusing to listen to people who got it right (by implication himself).

I think in the light of the article that McWilliams wrote in September 2008 we are entitled to view his current day pronouncements with a little scepticism.

@John
I’m not really in the business of defending McWilliams article. The sentence quoted – certainly is unambiguous in support of a guarantee of the sort eventually produced. But to suggest that he had major influence over the final product it is far-fetched which is really the point I’m making which you ignore. I really couldn’t care less what he thought then, although he wasn’t privy to the true state of the banks finances which were widely represented to be a problem of liquidity, and therefore he has to be givn the benefit of the doubt.
My major problem with the guarantee – as I have said elsewhere – is that it’s authors managed to create a guarantee which amounted to a thieves charter – without a get-out clause for cases where information was witheld or misrepresented.

My car insurance has a clause (ch 10 in my AXA policy booklet) which – as well as allows the company to:
– refuse to honour claims
– declare the policy void
– recover existing claims already paid
– retain the premium
– notify enforcement authorities
where there was deception, misrepresentation or omission of information liklely to influence the provision of cover. It could have been used without changing a word.

The omission of such a clause has never been explained – and smacks of either gross incompetence, or criminal negligence.

@AMcGrath,

The point I was trying to make is that if the Govt was wrong, David McWilliams was equally, or even more wrong on the guarantee. His proposal was even more extensive than the proposal that emerged. In case there is any doubt that McWiliams supported the guarantee here is his article the following Sunday.

http://www.sbpost.ie/archives/2008/1005/time-for-phase-two-minister-36455.html

I repeat what I said in my previous post: the responsibility rests with the govt. The media as the Tory Prime Minister Stanley Baldwin said have “power without responsibility – the prerogative of the harlot throughout the ages”. It is probably futile therefore to expect its practitioners to be “modest”.

Even with the benefit of what we now know about the financial position of the banks I think a guarantee was necessary. In retrospect the extent of the guarantee was too broad. However, I can appreciate the govt’s feeling that it had to make a decisive gesture to preserve the stability of the banking system. Perhaps it overplayed its hand. But given the reasonable policy to protect senior debt, the cost of the policy was not as significant as some of its critics imply.

I think your characterisation of the guarantee as a “thieves’ charter” and the actions of the govt as being “grossly incompetent” or “criminal negligence” is intemperate.

As far as David McWilliams is concerned. I think he was a very insightful economic commentator, but in the last two years he has resorted to populism. I find it very difficult to take him seriously anymore.

@ AMcGrath

I must agree that it is absurd to think McWilliams had any influence on the guarantee decision. It is dissapointing to see how enthusiastic other contributors are about pretending to believe he may have had an influence.

There is a distinct lack of enthusiasm to investigate who then did give the ‘expert’ advice. It was not the civil service, not Merill Lynch. If as now seems to be the vague implication, it was Europe, then we must believe that Christian Lagarde is a liar. That leaves the oligarchs, who we know we have God-like status to the clowns in FF (who never worked in the private sector ever in their lives and have thus never really understood the nature of ‘wealth creators’.

Once again I pose the question, did Dermot Desmond and Denis O’Brien discuss the situation with Finance, as reported in the Sunday Times, and if so, what did they advise?

As Private Eye used to say, we should be told. I can’t understand the reluctance of economists and journalists to pursue this question.

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