Year: 2010

One of the questions that has been raised time and again over the past few years is how exactly the government ended up taking the decision to provide an almost blanket guarantee to the banks. In an interview yesterday with Marian Finucane, Green Party leader, John Gormley, shed some new light on this decision. Here’s an excerpt (about twenty minutes in).

John Gormley: 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.

Marian Finucane: When was that decision made?

John Gormley: That was on the day before. It was a Sunday. We had a Cabinet meeting. We’d gone through it in quite a bit of detail as I said.

Later there was this exchange:

Marian Finucane: Can I just ask you a question? I think the rest of us thought that the two Brians … that the decision was made that night.

John Gormley: Well, 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. Everybody had to be involved in what was the best thing to do in these circumstances.

Then when asked whether he understood at the time how momentous the guarantee decision was “nailing the sovereign to the banking difficulty” Gormley rolled out the following

You have to look at what Patrick Honohan has said. Again, as somehow who has been brought in, who has been quite an independent voice, the first outsider to be brought into that position. He did write a report. Again, it was a very thorough report. And he said very clearly in that report that while the bank guarantee may have been too broad, in that it included subordinated debt, that it was absolutely essential because of the systemic importance of some of these banks.

I’d make three points on this.

First, Minister Gormley tells us that the decision to give a blanket guarantee was made by the full Cabinet on the Sunday because this was the recommendation of expert advice. I think Minister Gormley should release this expert advice to the public and explain who it is that gave it. As of now, we know that the government’s very expensively recruited advisers Merrill Lynch (€7.33 million in fees) stated at a meeting on the previous Friday that they were against such a guarantee. Handwritten notes taken at a meeting involving the Minister for Finance and representatives from the Central Bank, Financial Regulator, Department of Finance contained the following:

On a blanket guarantee for all banks — ML felt could be a mistake and hit national rating and allow poorer banks to continue.

So what happened between the Friday and the Sunday?

Second, the continual rolling out of the talking point that “Honohan’s only objection was the inclusion of subdebt” does a disservice to all those who parrott it.

Here’s the most relevant section (8.39 in the report):

The scope of the Irish guarantee was exceptionally broad. Not only did it cover all deposits, including corporate and even interbank deposits, as well as certain asset backed bonds (covered bonds) and senior debt it also included, as noted already, certain subordinated debt. The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options. Arguments voiced in favour of this decision, namely, that many holders of these instruments were also holders of Irish bonds and that a guarantee in respect of them would help banks raise new bonds are open to question: after all, extending a Government guarantee to non-Government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds; besides, new bonds could have been guaranteed separately. The argument for simplicity also is weakened significantly by the fact that an actual dividing line between covered and non-covered liabilities was drawn at as least an equally arbitrary point; moreover, such instruments were held only by sophisticated investors.

The key point made here by Honohan is not, as Gormley and many other government politicians insist, that subordinated bonds were included (this decision is singled out in the short paragraph 8.40 that followed and later in 8.50 as “not easy to defend”). Rather the point was that the guarantee applied to existing bonds rather than new debt issues. 

Most likely, Gormley (and the others who make this point) haven’t read the report or have read it and don’t understand it. They are, most probably, simply repeating a talking point supplied to them by their spinners. And I suspect the Governor isn’t willing to request government politicians to cease-and-desist from misrepresenting his report, particularly given that his critical opinions on blanket guarantees were well flagged elsewhere. However, it would be nice to see interviewers refusing to accept this nonsense anymore.

Finally, I’d note that it appears that Gormley is more worried about the image of him not being consulted about the guarantee than he is with being considered responsible for it. This seems like poor politics. He’d be better off to have placards in Dublin South-East saying “Guarantee: Not My Idea” than “Guarantee: I Wasn’t In Bed”. But he’s entitled to make his own decisions on which message to get across. And, as he noted in his interview, politicians are ultimately made accountable at the ballot box. The public can soon show what they thought of Mister Gormley’s period in government.