Cowen and Advice Relating to the Guarantee

This has been touched on on this site in Dec. My thoughts…..

You will probably find the key to this lies in something as simple as WHO, either in the decision making process or connected to someone in a position to influence the decision, was going to loose deposit / bond investment if a more prudent and logical decision had been taken.

Something like this was suggested to me weeks in advance of the Anglo etc guarantee anouncement at the time I was suggesting Anglo would probably go under and take creditors with it. I was told I didn’t understand how small Dublin is.

I think it will be a badly (or non-)advised individual or group that woke up very late to the fact that deposits or bonds in Anglo were going to disappear in the next few days, that motivated a panicky phone call to the appropriate chap who would do the necessary

I am now of the opinion that this is the direction that any investigation should concentrate on frst.

What was the date of the post-Lehmans meeting of EU Finance Ministers where they agreed and announced that no systemic bank would be let go under? It post-dated the said DoF position as Lehmans folded in Sept 2009. It is not clear that the said memo countenances the world-wide risk fo contagion that later manifested itself. The Merrill Lynch advice came later of course.

“It post-dated the said DoF position as Lehmans folded in Sept 2009.”
should of course read
“It post-dated the said DoF position as Lehmans folded in Sept 2008.”

@ Karl Whelan and Brian Lucey.

In his three articles before the guarantee David Mcwilliams was advocating a guarantee. The closer we got to the actual event the larger and wider in scope his proposal was. In the last article he advocated guaranteeing in the blanket style we eventually saw.

We Know from McWilliams own book that he had the ear of the Minister of finance and that they had phone calls and meetings.

We also have evidence that McWilliams helped convince John Gormley that the guarantee was the way to go from an article in the Sunday Business Post.

We also know that in his article in the Independent on the following Wednesday in which he described the guarantee as “Lenihans masterstroke” that there were people in the dept of finance that did not want to guarantee Anglo and NIB.
” The minister obviously thought that by guaranteeing some banks and not others — as some of his advisors argued– he would open up the prospect of the weaker banks undermining the stronger ones. He has put the system first and that can only be a good thing.”

Is it because he is a mere journo that you guys have trouble seeing what is fairly obvious?

Another good question to ask might be how did Mc Williams know what it was “some of his advisors argued” unless he was briefed?

In saying that I think McWilliams was set up. His prescription was for a stark liquidity crises. He didn’t know the scale of the losses in the banks at that stage. Perhaps he should have but he wasn’t alone in thinking it was a liquidity crises at the time. The Government and the banks knew different.

@ Prof Lucey

Back on topic. That is a very interesting snippet but not for the reasons you suggest. It shows how very difficult it would have been to have walked from INBS never mind walk from Anglo.

It is really quite sickening how the likes of Labour and Sinn Fein, who were simply mouthing socialist soundbytes, can cite the deterioration of our position with hindsight as a vindication of their approach. Firstly, if the attached document is typical, it would have been very difficult for any responsible administration to have adopted anything totally radical in the way of torching bondholders. Secondly the recommended route of total nationalisation was not accompanied at the time by any proposal to torch bondholders and, if anything, would have made such a bonfire even more problematic.

All this talk about should they have?, why didn’t they?, what if? etc. boils down to one question. Is there any alternative course which would have allowed for a significant conflagration of bondholders whilst keeping the economic and banking system afloat? There is nothinhg else at stake here. IMHO no matter what we did at whichever point in time we were never going to get away unscathed from a significant torching of bondholders.

@ Eamonn Moran

With you all the way until that last “conspiracy theory” bit. I honestly think even the bankers beleived their own hype. They genuinely believed that the loan book was sound, that all they were facing was a credibility/liquidity crisis. Morgan Kelly called it, but I believe he was unique.

Oh God, we’re not still claiming we can sell deposit books in the manner that was claimed in the Indo are we? For the uninitiated, here is the exact wording used by the Prof on that other fateful day…(and note that he brought it up, not me…)

http://www.independent.ie/business/keeping-it-alive-will-cost-an-arm-and-a-leg-with-any-upside-hard-to-ascertain-2120306.html

“Anglo can be wound up cheaply — here’s how. Sell the €28bn deposit book. This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn. Sell the bonds and withdraw deposits in other banks. This gives a further €14bn, a total of €35bn, that is sufficient to cover the senior bondholders (€13bn) and the interbank deposits with NAMA (€16bn), with €6bn left over.”

By using the word ‘discount’, you clearly thought that the sale of the deposit book would produce 21bn in cash, like an asset sale worth 21bn would. You thought it was an asset. Don’t believe me?

“There is a loss to be paid on the deposit book, and potentially on the fact that the remaining loans are not worth their book value but this is much, much less than keeping it alive.”

Again, you thought it was an asset. You completely misunderstood how it formed part of the bank balance sheet. And yet you keep claiming you’re technically right because other people used the phrase “sell the deposit book” too. They mean transferring the deposit book, and maybe receiving a small consideration in return. Like 1%, or less, of what you are suggesting. Why do you keep bringing up what should be a horribly embarassing moment for a TCD Professor of Economics???

“It is really quite sickening how the likes of Labour and Sinn Fein, who were simply mouthing socialist soundbytes, can cite the deterioration of our position with hindsight as a vindication of their approach.” – BWII

@BWII
You might be interested to know what Sinn Fein’s position was at the time. Here is a link to a press release on 17/10/08.

http://www.sinnfein.ie/contents/13929

The document shows that the party voted for the original guarantee, but then a couple of weeks later began to have some reservations. But its reservations had nothing to do with the core principle of the State guaranteeing the liabilities of the banks. It remained supportive of this.

David McWilliams is not the only one who has had a radical change in his position.

@ zhou_enlai

What was the date of the post-Lehmans meeting of EU Finance Ministers where they agreed and announced that no systemic bank would be let go under?

Oct 07: “We have agreed to support systemic financial institutions. We all commit to take all necessary measures to enhance the soundness and stability of our banking system and to protect the deposits of individual savers.”

Apart from Ireland, only Denmark guaranteed existing debt. Both countries had made these moves before the Ecofin meeting.

Chart here on bank exposure of 12 advanced countries during crisis:

http://www.finfacts.ie/irishfinancenews/article_1021128.shtml

The Merill Lynch advice was wishy-washy; Hurley and Neary were out of their depth believing the banks’ versions of events, even taking the latter’s subsequent statement’s alone into account. Cowen must have been in regular phone contact with FitzPatrick on Sept 29/30 — after all the crisis had been brought to a head by Anglo’s troubles.

The umbilical link between Anglo and FF was a factor of course in the decision making; the DoF people who would really have created an earthquake if they had threatened to resign on principle, which would be an Irish precedent, presumably had little impact.

Crucially, the political leaders were relying on bullshit assessments from the banks themselves.

The most urgent issue was to stem the outflow of deposits; why not go ahead with the unlimited deposit guarantee and hold the guarantee of debt in reserve?

It all comes across as very shoddy. Did McWilliams’ dad belong in a cumann or something? The biggest decision in the history of the state and the muppets in charge go off on a solo run against the advice of all the experts.

It was all run according to the maxim “sure it’ll be grand”. Sure what harm could a guarantee do? Sure weren’t the banks all grand? Sure wasn’t the Celtic Tiger grand ? Sure weren’t those people complaining only whingers? Sure wasn’t Seanie an great businessman? Sure wasn’t AIB world class?

@ The Alchemist,

Mr Gray did clarify that he had never met Mr Fitzpatrick prior to that meeting. Though after this initial meeting, Mr Fitzpatrick initiated two additional meetings with Mr Gray.

From http://www.irishtimes.com/newspaper/ireland/2011/0114/1224287489638.html

“To Mr Gray’s surprise, late in September, possibly on the 29th, Mr FitzPatrick and Mr Drumm arrived unexpectedly at his office. When they were met, they expressed their view that due to the crisis in the international financial markets, Anglo were experiencing extremely severe liquidity difficulties – a fact which was of no surprise to Mr Gray as this was by now well known in the financial markets. Mr Gray again indicated that they should discuss this with the Central Bank officials and they indicated that this had been done. Mr Drumm had a presentation with him but did not give this to Mr Gray and he used it as brief speaking notes. They did not ask Mr Gray to take any action or make any representations to any other parties. Mr Gray then concluded the meeting which in total had lasted approximately five to 10 minutes.”

Makes you wonder what Mr Fitzpatrick and Mr Drumm were hoping to achieve and why they thought it worthwhile. It seems that one chance encounter at Druids Glen gave Mr Fitzpatrick the impression he had the right to bend Mr Gray’s ear. It does seem unlikely that Sean F. wasn’t bombarding his better placed contacts with meeting requests.

@Eoin

The absolutely most stupid thing the Irish government could have done at any point was to close out its options for nil consideration. They probably had no idea about the concept of option valuation.

Including bonds that had already been issued in the guarantee was just plain stupid. Maybe it was showing-off to try to look confident. Most market based observers copped this straight away and the fact it was such an irrational thing to have done made many international investors that hadn’t already, start to wonder about their basic assumptions about Ireland.

They could have set about getting parallel banks in place to at least threaten to leave the creditors (including the employees, bonus pots, contracts and pensions) in the old banks while giving golden hellos (compensation) to depositors transferred across in or prior to a liquidation.

They just picked the worst option available to them – it amounted to “Look at us! we have no idea what we are doing!!!”

The sad fact is that the ECB has told us what is or isn’t allowed….

Any reliable source for this claim?

@ Ahura

the ECB were against the guarantee, but they were also against any even modest burden sharing beyond equity and subdebt. As such, the two stances cannot work in tandem to any meaningful effect. They appeared to want an implicit guarantee which would be honoured in near fullness.

@ Kevin

the negotiations with the IMF made clear that the Irish government asked could a senior debt restructuring be considered as part of the deal, and the EU/ECB said no. Its on the record. Bini-Smaghi said as much again on Saturday in the Irish Times.

@ Grumpy

its a fair point that the initial decision may have set in train the negative sentiment which ultimately sunk us.

@ Kevin

we don’t have a paper trail going back as far as Sept 2008 in terms of what the ECB said, other than the “save your banks” comments from JCT. We do however have de facto information on the more recent comments from the ECB on senior debt, which when combined with fairly sensible joining of the dots in recent years would suggest that the ECB has been the key decision maker on most decisions made across the Eurozone in recent years. If you’re looking for verifiable sources, i’d suggest you’ll miss half the trick being pulled here. Also, to say that the IMF negotiations have nothing to do with the guarantee is more than a bit blinkered, no? Its the ultimate conclusion (or end of Act II) for a story that began on that fateful night in Sept 2008. There was lots of cause and effect in between, but they are the two events that are completely intertwined.

Eoin,
Once Ireland guaranteed senior debt it ceased to be just senior debt. The ECB says that, having guaranteed it, you can’t walk away from it. That’s not evidence that they ever suggested issuing the guarantee in the first place, much less that they were telling us “what is or isn’t allowed” back in 2008.

@ Kevin

we could walk away from it right now, but they don’t want to let us. Do you think that this line of thinking is only a fresh one for them?

“Do you think that this line of thinking is only a fresh one for them?”

Let’s suppose it isn’t. Let’s suppose they have felt that way since the ECB was created. That still doesn’t mean they were telling us “what is or isn’t allowed” back in 2008. Do you have any evidence whatever for that claim?

@ Kevin

an inability to read between the lines will only leave you illinformed of the realities of how we came to be where we are today. Realpolitik often doesn’t come with attributable sources, so apologies if we cannot assure you of the veracity of the claim beyond that. Pretty much everyone on here feels its more or less how things went down anyway. Whether we should have let them dictate policy, is of course, another argument altogether.

@Shay Begorrah

“* We could not have done anything differently as regards the banking crisis.
* We need to keep to the path that brought us here.
* David McWilliams is at least partially responsible for the mess we are in.
* The Croke Park agreement led to the international financial crisis.”

Hadn’t noticed anyone bring up Croke Park on this thread and hadn’t noticed anyone, anywhere implying or suggesting it led to the international financial crisis.

Rather like the blanket guarantee – covering already issued bonds – it did close off the government’s options in spite of a continually worsening outlook for the structural deficit. That was noted by bond market and contributed to its collective decision to close to Ireland.

@ ObsessiveMathsFreak

That is a seriously off topic rant. Karl has observed that the reasons for the guarantee decision will now be a key element in Cowen’s FF leadership survival. I presume this is referring to the suspicion that the reasons had rather too much to do with Seanie croneyism than could be in any way be helpful electorally.

I and others have pointed out the rather more simple explanation for the particular form of guarantee as being the influence that McWilliams then had over Lenny. This is not to blame McWilliams nor is it even to concede lazily that the guarantee decision was the monumental disaster that seems to becoming the accepted wisdom.

@OSM
+1.

I think you should get a more appropriate nom-de-plume though.

@Kevin Donoghue

Did anybody ask Ben Smagi to account for his running of the ECB.?
Ask him whether it was usual for a central bank to allow fully fledged casino banking operations in its bailiwick?
Ask him if he ran the ECB so well why are so scared of letting banks go to the wall as they do in the US?
Oh sorry, they forgot to plan for this eventaulity!
Ask him whether it was usual for a central bank to provide lender of last resort facilities?

We need to ignore people in positions of power that have ***up and listen to people with solutions.

@ Eoin B,

“the ECB were against the guarantee, but they were also against any even modest burden sharing beyond equity and subdebt. As such, the two stances cannot work in tandem to any meaningful effect. They appeared to want an implicit guarantee which would be honoured in near fullness.”

It appears that Sean Fitzpatrick could contact the MoF in Vietnam, but Trichet had to leave a voicemail because the MoF was at the races. It is very surprising that Lenihan didn’t seek to involve the ECB/EU. You’d expect a politician would recognise the cover this would provide. Was it the case that they feared the ECB would advise the nationalisation of Anglo & INBS?

The Irish bank guarantee put us in the position that we were on the hook. As a result the prospect of burden sharing was severely limited. The attempt to look at burden sharing came too late. At that point the ECB held the aces.

For ‘tactitly’ read tacitly.

@Joseph Ryan
Perhaps I’ve given you a false impression of my opinion of the ECB. I think it’s a lousy central bank. But that’s no reason to excuse Irish politicians for decisions supposedly made at the ECB’s behest — quite the contrary. The worse the central bank, the more important it is to find ways to mitigate the harm it does.

@ grumpy

It is debatable (though you may be right) that the collapsing bank prices of 2008 were due to market prescience on the scale of toxic assets. I suggest two counter arguments.

1) 2008 was the full blown credit crunch. Credibility and therefore liquidity were seriously impacted. This had very negative implications for Ireland’s banking model and would have warranted very significant corrections to share prices even if there were no concerns about the assets. For example, no-one has ever questioned ILP’s solvency and yet its share price has suffered nearly as badly as the others.

2) If the markets are so smart why were they valuing Irish banks at ridiculous highs in 2007, when at that stage all the bad lending had been done?

Kevin,

By you logic, the ECB which opposed the guarantee in 2008 should have rung up the Irish govt and avised them of the stupidity or even the illegality of a blanket guarantee on all liabilities. But they did not. Why not…because as EB says it was entirely consistent with their policy of no seniors left behind.

True, the guarantee, particularly of Anglo was an utterly stupid policy. However, it was 100% in line with the ECBs line that senior debt should not be risk bearing.

How much pre 2008 stuff is still on the books… about 20bn we are told. I do not think this is covered by any guarantee..apologies if incorrect. The ECB doe not let us impose losses on that …do they.?

@ Kevin
I take Lenny at his word. He was told to “save the banks” by JCT.

Did JCT know about the Irish property problem? If not why not?
Is it a case that for at least the second time in his career he has been “at the helm” when a bank has invested in bad property deals, where the solution has been a “good bank” bad bank approach, where the tax payer got screwed for massive bailout and where nobody went to jail.
The evidence is circumstantial, I know but the parallels are too disconcerting.
JCT should be made answer questions just as Bernanke does.
It is utterly appalling that he should not be held accountable for anything. Not just the guarantee but the low interest policy to support German growth regardless of the risk to the periphery for example.
But we will not get that opportunity because European institutions do not do accountability or democracy.

@bw2

Your point 1):

I was originally responding to your view that MK was “unique” in thinking that at least one Irish bank was actually insolvent rather than just having a liquidity problem. I know that was not the case – not least because that was also my own view, which, while a minority one, was far from unique. I simply tried to illustrate this by reference to the determined shorts in Anglo 2008 (many of whom were active long before the general equity market turmoil of Sept and Oct 2008). There were also plenty of long-only guys emptying their portfolios. Among both groups, there was a significant sub-set that thought Anglo was actually insolvent.

Your point 2)

I didn’t imply the market was “so smart”. My point was that there were many people active in the market, that were indeed so smart (or more accurately, exercised good judgement). They were generally a minority in the market, but the point is that they existed and they were not all nominee accounts under the control of Morgan Kelly. They were many, many asset managers. Alongside them were many analysts.

Had these guys not been so much in a minority, it would not have been possible for Sean Quinn to ramp up the price of Anglo shares quite so high, for quite so long – in which case the property bubble might have been less highly inflated and the government might not have been so panicked into the action it took. Had there been more shorts in the market for Irish bank shares, with more liquidity available to them, it would have done Ireland a big, big favour.

They did exist though, and it is not credible to argue that none of them estimated Anglo was bust.

Your point about Irish banks being “valued” highly by the market in 2007 has to accommodate two things. First, that it was partly a false market thanks to Quinn and momentum players following the false moves. Second, the market is not homogeneous, and there are always bulls and bears. There were many very determined bears back in 2007, just because they were not in control of the market then does is not an argument that they did not exist.

As for ILP, I don’t know of anyone who took any real interest in it. From an international perspective it was a tiddler. To the extent its share price went up and down, it was probably mainly being marked up and down by the Irish market makers to keep their books flat as the sector moved.

I see where the IMF are going to Spain to initiate a soft credit line. It looks like it’s low interest credit with few strings attached.
It seems a sensible approach.
Is it possible to ditch the stupid deal we have struck in favour of something like this instead??

@Keith Cunneen

“my hunch is that from late summer 2007 – many people were moving 20,000 into multiple banks –
Were they just hyperactive rate tarts or did they also believe that the banks were sunk in their present manifestation ?”

In a sense this is more important than the equity market behavior. Deposits were fleeing precisely because the view that Anglo was insolvent was becoming more popular. It doesn’t mean each depositor or treasury manager who moved deposits was convinced Anglo might actually be insolvent – just that some were, others thought it was likely, others that it was possible, others that it was unlikely but no point in taking the risk.

The upshot is that it is unsustainable to claim that a bloke with a thing about the economics of goats in the middle ages was the only guy who took this view – and therefore, why should the government have factored the risk into its decision making.

Also the gov took the view that winding up a bank, in a post Lehman world, would cause mayhem, especially given our inadequate resolution procedures. Therefore they were never going to do it – and therefore nothing was lost by explicitly guaranteeing the debt.

Anything less than a guarantee of all liabilities left room open for a default to happen – if a default had happened then depositors, despite their guarantee, may have had trouble in the days that followed the default, getting their hands on their money – this fact alone could have led or contributed to deposit withdrawals.

@BWII
“I was just making the point that a liquidity crunch was enuff to decimate Irish share prices, it does not necessarily mean that the markets also knew there was a serious solvency issue.”
Well, a liquidity crunch is effectively a solvency issue for a bank, particularly if it goes on for an extended period. The Department of Finance were aware of this at least in February 2008 and produced a briefing paper (paper 37 http://dail.ie/documents/committees30thdail/pac/reports/documentsregruarantee/document37.pdf ). I suspect they were aware of it before, because it is a truism of banks…

+1 on the the cui bono. Tired of saying this from the week after the guarantee…

Off threads, but I am looking for suggestions as to what legal issues arising out of the banking crisis would be of interest. I have to give a conference paper and need some suggestions for topics. One possible thought is the legal implications of imposing debt sharing on bondholders?

gadge,

Seems to me an obvoius one is to compare and contrast the illigal share support scheme and resulting PROSECUTIONS in the Guiness bid for Distillers, with the share support scheme for Anglo Irish Bank by first Sean Quinn and then a group of individuals asked to carry it on using non-recourse loans.

Ancillary to this is the Irish regulator’s (Irish regulation always was a bit of a joke wrt investments) involvement and the rater interesting tidbit that his only reaction to this was to investigate the short-selling of Anglo stock. Short-selling which, as it turns out, was in the national interest.

Start here if you don’t recall the details

http://en.wikipedia.org/wiki/Guinness_share-trading_fraud

@Gadge
What is the legal authority and legal limit of the Central Bank to fund the Irish banks or indeed any bank. Whose euros is it disbursing?

To CB/currency/Legal Specialist.
Where is the CB getting the €50 billion it has “loaned” to the Irish banks?
Where does it appear on both sides of its Balance sheet?
What collateral is it getting for this €50billion?
Is this ECB money and is there a liability to the ECB for this money or how does it work?
What is the CB limit on these funds?
When this started the funds came from the ECB. Why are they now coming from the CB?
What were the reasons for the change in source and what are the implications of the change in source?

McWilliams is getting quite a kicking of late re the guarantee. Surely one of its original progenitors deserves a mention. From the Irish Times of 17/9/2008, here’s Noel Smyth, solicitor, property developer (and golfer):

“In the present climate (where property is nearly a dirty word and where there is an I-told-you-so attitude from some of the more smug, negative commentators who, with respect, have never taken a risk in their life, never given anybody a job and certainly have never promoted Ireland Inc as a place to invest) there are steps that Ireland Inc and those of us in the property world can take to improve our profile and our ability to get investment into our country. Our main attribute is, and always has been, our people. We have the best brains and the most enthusiastic professionals, be they agents, surveyors, solicitors, accountants or bankers, all of whom are needed to identify, secure, acquire, finance and deliver projects….

If the Government was to persuade the Central Bank to guarantee all deposits in Irish banks operating under a banking licence from the Central Bank in the State, the effect would ensure that depositors considering investing in Ireland would know they had a State guarantee and that the banks would always ensure their money was repaid.”

@ Dr Bob

but a deposit is a liability, therefore you’re not selling the physical deposit, but essentially the deposit franchise, or deposit customer base, if you know what i mean? And the likely payment for this franchise would be, depending on rates paid for deposits, stickiness of deposits etc, around 25-50bps, not the 7500bps referenced in the Lucey article. So maybe 75-150mn, rather than 21bn. And as i noted, the terminology used (take a loss, sell it at a discount) would be indicative of an asset sale, not a liability transfer.

@ Kevin

given that the Irish govt has repeatedly and loudly said that they will not inflict losses on and will fully honour all unguaranteed senior bondholders, does Bini-Smaghi’s comments on “trust us, we will repay you” not make perfect sense? Ditto with the Chopra comments?

Does it not also seem a bit strange that, per your logic, we decided to guarantee senior debt in 2008, and the ECB was not of this view, but then when the IMF come rocking into town and we suggest to them the restructuring of senior debt, all of a sudden the ECB changes tack to our original position?

Throughout this entire crisis no Eurozone bank has defaulted on senior debt, despite the billions, and near trillions of announced losses, and the likely trillions in hidden losses. Does that not sound to you like some sort of harmonised policy being led by the ECB to ensure that there was no European version of Lehmans?

And actually just found the de facto evidence of the ECB/EU’s current position:

“Mr Lenihan said the government had raised the possibility of some burden sharing by some senior bondholders not covered by the government guarantee in the negotiations on the bail-out but this had been rejected by his European Union colleagues.

“I raised the question of whether we should have aggressive discounts of their bonds in the course of the discussions and the European Central Bank and European Commission were not prepared to support that approach.”

http://www.ft.com/cms/s/0/e63cf1b6-020f-11e0-b66c-00144feabdc0.html#axzz1BL3bsAHM

QED

Can we focus on solutions. Problem caused by Irish mismanagement but really huge ECB dysfunction. Solution to be carried by Irish only. (fair?)

This can and will be sorted out by a European wide mechanism. There is a real appetite in europe for reform of the EU. And here’s how the democratic reform would work

At local level everybody in Europe selects their local county councillors (equivalents all over Europe)
At national level there are national elections for national parliaments (these are not constituency based but nationally based)
At European level there are pan-European elections for the European parliament.
Essentially it all works along the lines of the Canadian Provincial system

At ECB level little spanners like JCT and that Italian putz must be held to account.
And then we can have a Europe for citizens and not for banks

@Ciaran
Not Irish against foreigners – citizens against bankers.
Your assertions about the ECB are false:
1: They are not competent
2: They represent the interests of bankers – not citizens

The crucial issue is not whether a billionaire businessman did or did not speak to Cowen or bragging rights’ claims for being one of the architects of the guarantee.

Brian Cowen was either Finance Minister or Taoiseach from the news of the US subprime crisis in Feb 2007, the onset of the credit crunch in Aug 2007, the collapse of Bear Stearns in March 2008 and up to the collapse of Lehman Brothers in mid-Sept 2008.

Despite the potential fallout of a property downturn in an economy so dependent on this sector, he did not ask for an independent assessment of the bank credit risks and scenarios similar to what happened in the UK in 1990 when the property market crashed.

On Sept 29th, he had a memo from Merrill Lynch which had Anglo’s own estimate of 3% impairment on its €73bn loan book. ML provided options of wiping out shareholders and junior bondholders and given the bleak news from the US with Bernanke and Paulson pushing Congress for emergency action on a $700bn support for the banking system, it should have been clear that the situation for Irish property developers was going to get a lot worse.

The fact that Brian Lenihan would term the guarantee, the ‘cheapest’ in the world on Sept 30th, suggests how much in denial both Cowen and himself were.

@ Eureka/NJ Celt

Euereka, demagogues love folks like you.

As for comparisons with other countries, it’s usually a matter of picking the ones that suit.

Of course Iceland didn’t need any help from others: Nordic neighbours? IMF?

Comrade Chávez lent money to Argentina but at a punitive interest rate.

Iceland and Argentina are both commodity producers, which helps when there is a boom.

As for the latter, doing fine, compared with its potential early in the last century or in recent times compared with the once much poorer Brazil?

Besides, the country is trying to cut a deal with bondholders.

@ Michael H/Ciaran

You folk have a lot of facts at your fingertips. You are are not shy to point the finger at the (many) flaws in our public sector.

Are you seriously stating that central bankers are defending the public interest ? The evidence is overwhelming, at home and abroad, that CBs are primarily vehicles for the protection of vested interests in the financial sector.

Our own CB facilitated the most brazen looting by rogue bankers and thier associates. The ECB sat idly by while the big EZ banks stuffed themselves with subprime and other toxic derivatives. The Fed unleashed a flood of QE to keep Wall St bonuses flowing. The BOE’s record in regulating the City of London is feeble to say the least.

One of the big reasons that extremism takes root is that reasonable people continue to defend the indefensible. Something is rotten etc.

@Eoin Kevin, Ahura and everyone else.

What is missing here is a full account from two of the main protagonists.
Brian Lenihan and JCT.

When Lenny eventually got a message saying “save your banks” isnt it likely he would have tried to call JCT to clarify?

What Kevin and the rest of us would like is to do is to know from Brian L and JCT what was said in any conversations they had that weekend.

If JCT told Lenny to “save your banks” then they owe us big time and that card should have been played at the bailout talks.
Why wasn’t it?

At the moment way more questions than answers.

I wonder who knows where the bodies are buried. Given the behaviour of senior FF ministers like Hanafin, Carey, Dermot Ahern and Killeen during the high point of the November shenanigans, it is clear that information in the cabinet was not shared around equally.

The third estate in the form of the journalists have a very poor record in speaking truth to power.

Would some of the Greens know something? There must be a few heads in the DoF who do. The banks must have some headers too who know.

The system is broken which should increase the possibility of an Elmer style whistleblower emerging.

@ Eamonn Moran

The answer to your question on JCT would likely be akin to the revelation of the fourth secret of Fatima – – a big letdown.

As Ciarán O’Hagan detailed earlier, there was no consultation; if the argument is that they thought they were acting in accordance with JCT’s wishes, what was done was akin to that of a head of an MNC sub making a very big decision without consulting Hq because he had a phone conversation with the CEO a week before.

I would like to see interviewers with higher levels of economic literacy doing any of the important interviews with Brian lenihan or Brian Cowan so they don’t get away with it.

Absolutely — the standard of media interviewing is woeful.

In Ireland, the Taoiseach of the day calls the shots with the State broadcaster and the quid pro quo is that the convenient status quo is left alone; as for the rest, why would they engage in forensic questioning when they would then be denied any further access.

In an ideal world, RTÉ would publish details on ministerial refusals to answer questions.

@ seafóid

Whistleblowers are hated, even by people of integrity.

As for resigning on principle, that with surely be strange in Ireland.

Usually people get their back teeth when they are superannuated on fat pensions.

@ paul quigley

Many democracies are imperfect — some more than others.

At least the Irish PM isn’t under investigation for underage sex and other issues.

As for the ECB, it has had a narrow remit under Maastricht and regulation was an issue for individual CBs.

In 2004 when it wanted the Stability and Growth Pact rules strengthened, it got a big PFO from Chirac and Schröder.

We operate like Italians would running British systems.

Much of the corruption in Ireland happens to be legal.

Nothing like a debate on the guarantee to put this blog into over drive! If I looked at the number of posts I could guess the topic without any hesitation.

This is my summary of the events
-The guarantee in Sept 08 was far too broad
-This greatly limited our range of future options
-The limitation of our options has IMO cost us money
-The ECB/EU were not consulted at the time and thought that the guarantee was too wide
-The ECB does not want us to burn senior bondholders NOW
-We shouldn’t have agreed to this as it is not in the interests of the sovereign.
-We will eventually default on either/both senior debt or sovereign debt

“I would like to see interviewers with higher levels of economic literacy doing any of the important interviews with Brian lenihan or Brian Cowan so they don’t get away with it”

Elites don’t do that. Cowen and Lenihan have zero economic competence.
RTE aren’t going to show that to the people. RTE’s main job now is ensure there isn’t a bank run.

@ Eoin
Take your point.
Forgive me if I’m paraphrasing but is the bottom line that even though JCT was not responsible for the mechanism of making the sovereign liable for the bank debts he was responsible for driving that general plan?

In Credit Lyonnais he didn’t have the problem because it was already state-owned. But in Anglo they had to devise some mechanism whereby the bank debt would become state debt and that’s where Lenny came up with his blanket guarantee? Guarantee of nationalisation didn’t make much odds. Once we were burdened with Anglo, that was it.

@Michael Hennigan

Whistleblowers may be hated but they are more likely to come forward when things are falling apart, as is now the case with Ireland. The Swiss cave in over bank secrecy is now reverberating with Elmer, for example.

Seánie and Drumm are bitching over who was not at all responsible for the collapse of Anglo and Cowen gets sucked into the conflict. There will be lots more backstabbing and betrayal to come as players jockey for position. It is all very Irish.

@ Seafoid

You’re overthinking it i reckon, Ivan Yates is his own man and newstalk is an independent station. There is just a serious lack of knowledge and sharpness amongst those who carry out the majority of these interviews, plus they are all so worn down by the constant empty rhetoric we get from our politicians that they probably feel like men shouting into a gale force wind at times.
George Hook was the same yesterday with Cowen, you could tell he want ed to pin him down and make him somewhat answerable, but he just doesnt have the acumen and knowledge to cut through the bluster…..his own bluster doesnt help matters either..

@ Michael H/Eureka

bank restructuring was common, but yet senior debt didn’t seem to take as much as a finger being singed. Equity got wiped out back then (or asked to kick in additional capital), but we never progressed much further than that. And while i don’t claim that Anglo and INBS were systematic, i think a collapse of the scale of Anglo would have been difficult to justify a fortnight after Lehmans. That was essentially the ECB mantra – stabilise your banks and don’t let any of them go to the wall. While we went way too far with a blanket guarantee, what they suggested implicitly required either backstopping or making whole senior creditors. Whether explicit or implicit, i don’t see how we could have changed the end result?

politics.ie have a scoop from the zero hedge website claiming that Ireland are printing 25% of our GDP in German euro.

Is there any truth in it?

@Eamonn,

Under ECB guidelines if a central bank wants euro cash printed it normally talks to other central banks and they ‘club together’ their needs into one print run at one printing works.

For example, in this post looking at the €500 note http://blog.cornerturned.com/2010/12/13/the-e500-question/ we can see that only two central banks have ever printed €500 notes, and yet they are in (reasonably) widespread circulation.

The location of the printing, and the letter the note starts with is meaningless and only of use to conspiracy theorists.

The bank guarantee entails that some debts will be written off. I am curious about how the ‘write off’ component is treated. Somewhere down the line individuals and corporations must benefit from write off of debt, but the underwriter seems to be the Irish taxpayer. Any comment?

And by the way, the IFA are playing a blinder protecting farmers (members) interests when repossession is threatened. if only the broader public had access to the same leadership and can-do attitude.

@grumpy yeah sadly zerohedge ‘jumped the shark’ a while ago.

Archives of suddendebt is my favourite at the moment, check out from 2006 / 2007.

http://ftalphaville.ft.com/blog/2011/01/18/461881/the-mechanics-of-irish-euro-printing/?updatedcontent=1

@seafoid

Which Irish academic economists have been involved in advising the Irish government since August 2007 ? I know Alan Ahearne is/was an adviser but who are the rest ?

JTO again:

You will be pleased to know that Alan Ahearne’s latest pronouncements bear an uncanny resemblance to what I have posted frequently on this site. As reported in today’s Irish Times, speaking before an audience in Galway last night:

‘Exports will boost recovery – Ahearne’

There was tight Garda security at a public meeting hosted by Galway West Fianna Fáil TD Frank Fahey and Government advisior Alan Ahearne in the Clayton Hotel, with both uniformed and plain-clothed Garda present both in and outside the conference room.

THE MINISTER for Finance’s special economic adviser Dr Alan Ahearne told the meeting that ‘the current growth level of exports is much stronger than he had expected’.

Dr Ahearne, who was heckled at the meeting attended by several hundred people in Galway, said that this ’13 per cent growth in exports would have a significant impact on economic recovery’.

He also said he did not believe ‘there would be further significant wage cuts as competitiveness had already improved significantly’.

Just for the record:

In March 2010 on this site, JTO forecast ‘10% to 12% growth in exports in 2010’, at a time when the official government forecast was for 0.4%.

Just after Christmas 2010, JTO posted on this site ‘there is no need for further deflation, as the 13% annual growth in exports in Q3 shows that the economy is now highly competitive.’

Spot the similarities.

It is unfortunate that, in the present climate in Ireland, uttering these simple truths makes it necessary to have police protection from the mob.

@ JTO

I find those FF economics pronouncements very hard to take seriously ever since this :

“THE IRISH public is determined to remain in control of its own affairs despite the scale of the financial crisis, Minister of State Martin Mansergh told leading economists in London last night.

“There is a determination to try and maintain control as far as we can in our affairs, and to avoid – and to do whatever we have to do to avoid – outside dictation either on expenditure or taxation”

http://www.irishtimes.com/newspaper/finance/2010/1019/1224281443934.html

@ Grumpy

Alan Ahearne reminds me about that old GAA joke.

Manager – Joe, we’re taking you off.
Joe

http://www.merrionstreet.ie/index.php/2010/09/confidence-in-action-speech-by-minister-for-finance-mr-brian-lenihan-t-d-shelbourne-hoteldublin/

Confidence in Action: Speech by Minister for Finance Brian Lenihan, Friday, September 24th 2010

“It is important for journalists to be aware of the self-fulfilling nature of doomsday scenarios. I do not wish to exaggerate the point but it is undoubtedly the case that the media can undermine or promote confidence in our economy. Media reports here at home are beamed around the world and can influence the decisions of foreign investors and multinationals. ”

“And on the subject of expertise: I accept we are gifted with quite a number of Renaissance men and women in the Irish media. We are very lucky in that respect. But surely there have to be limits to the areas of expertise of some of our leading columnists. Not everyone can write authoritatively on our current crisis and far be it from me to limit their horizons but perhaps some of our columnists might question the value they can add to the debate. There are after all, very many accomplished specialist columnists in the area of business and economics. “

Back in November there were 3 legs to government spin :

-Exports
-Plenty of cash reserves
-€25 bn in NPRF

http://www.merrionstreet.ie/index.php/2010/11/speech-by-minister-for-enterprise-trade-and-innovation-batt-o-keeffe-td-at-ida-ireland-business-development-dinner-irish-embassy-in-london-15-november-2010/?cat=

Now they just talk about exports

@ Seafoid

They only talk about certain exports too. i.e not the human kind that we’re packing off weekly and getting nothing in return for. Their ability to be in government but never discuss the mosting pressing issues is truly remarkable, whens the last time you heard any govt TD discussing at length the current mass emigration thats happening amongst young people in Ireland. They just dont….. instead you get “good news, unemployment figures have stabilized…” jaysus, i wonder why..

@Eoin
Thanks for clearing that up.

@ NJ Celt

genuinely confused about what you’re suggesting – that we leave the Euro? You certainly didn’t make a joke, you didn’t even really make a point. You just kinda threw a few words down around Iceland and Argentina, the point of which is still unclear. Its certainly also unclear how “good” things are in those countries when you consider the cost of importing anything has jumped by a few hundred per cent since they defaulted. We’ll be grand with our meat and potatoes, but cars and petrol may start to seem a bit pricier post-default. The likelihood of trade barriers being erected by the remaining EU also seems more than just a possibility.

@Bryan G

That says it all. And the worst thing is that today, more than 2 years on, RTE are reporting that an endorsement by Lenihan is a great boost for Cowen. He is still in the job and still has credibility.

Biffo gets the kiss of death from FF. AIB shares rocket to 20 Euro. The bailout is off.

Ireland is not being bailed out. The bank bondwallahs are getting their money back and Ireland then owes the money to the ECB and the IMF, as I understand it. It is just a debt solution to a debt problem. More debt is like more violence. Incredibly attractive but rarely effective.

From p.ie
http://www.sinnfein.ie/contents/19907
It’s very revealing that in Ireland even such innocuous questions lead to the threat of a libel case…which will never actually happen anyway.

@Karl
Without questioniing the value of Merril Lynch’s advice, but I just wonder when and why exactly they engaged those partivular experts. I know it’s considered ad hominem in here and “shooting the messenger” is frowned on but I would like my advisers to demonstrate a capability to run their own affairs before I would ask them for advice about mine.

“Bloomberg reported in September 2008 that Merrill Lynch had lost $51.8 billion in mortgage-backed securities as part of the subprime mortgage crisis.”

@gadge
apologies if this is a bit late but 140+ entries tkaes a bit of time to scan – a question which I have raised ofetn without getting a satisfactory answer to is – why exactly was ther no clause added to the SI which brought in the orignal blanket guarantees and ideed subsequent ELG which would have requred the beneficiaries (to be clear I mean the banks ) to be completey upfront about their liabilities – otherwise they guarantee would be void. In a similar way to standard insurance contracts.
It seems they issued a guarantee without any idea of the extent of exposure they opening us to.

@Eureka
Didn’t intend to do so. We haven’t got a monopoly – we’re just one of the market leaders.

Politicalworld thread in same forum:

Lenihan ordered the NTMA to deposit 250m in IL&P in June 2008

——————————————————————————–

From the print edition of the Sunday Times 16/1/2011 by John Moloney. No online link as its behind a paywall:

Quote:
Brian Lenihan, the finance minister, ordered the NTMA to deposit 250 million euro in IL&P(Irish Life and Permanent) in June 2008.
The instruction came just weeks after the Financial Institution was told to ‘play the game’ by Pat Neary, the former Financial Regulator, if it wanted to obtain a large cash deposit from the state agency.
Allegations concerning Neary’s role in the deposit are contained in a statement made by Denis Casey,the former IL&P chief executive, to the Garda Bureau of Fraud Investigation which is investigating the banking sector.
Casey says Neary advised him to use a third party to present a proposal to the NTMA, after the state agency had refused to increase its deposits with IL&P. Neary allegedly told Casey at a meeting in May 2008 that the NTMA, the Dept of Finance, and Lenihan all needed to be able to show they had ‘clean hands’ if deposits were increased. The NTMA had twice previously refused to increase deposits with IL&P. After the financial institution followed Neary’s advice and appointed BNP Paribas, to make a formal presentation on its behalf, the NTMA lodged 250m.
A spokeswomanfor Lenihan confirmed last night that the minister had issued a direction to Michael Somers, the former chief executive of the NTMA to increase its IL&P deposit, but only on the provision the NTMA could obtain appropriated collateral and a good return, the spokeswoman said.

Quote:
Somers also confirmed that Brian Cowen had also issued ministerial orders instructing him to make large cash deposits in Irish banks in late 2007. He said Cowen had ordered him to leave funds in ABI, BOI, EBS and IL&P after the NTMA began withdrawing large cash deposits from Irish institutions which Somers believed were in financial difficulties as early as August 2007

@Eoin,

Yes I mean Ireland should ‘go the whole hog’. Renege on the guarantee, let that private debt be what it is private debt. Let the banks go if they have to go, write off the investment already made in them. And start anew.

Any other way is just making this problem worse and bigger. Ireland default is inevitable if Ireland does not choose this course of action. Doing this, Ireland is not defaulting on its sovereign debt its clearly delineating its sovereign obligations and they do not include supporting private banks bad decisions.

It will be tricky for a year or so until everything sorts it self out, but not the cataclysmic mess that all the VESTED INTERESTS try to scare us into thinking it will be. Otherwise Ireland will have a unbearable debt burden for years with default and a much worse situation at the end.

Also I wonder if what the government did back in 2008 in giving this guarantee might be unconstitutional. Has anyone considered challenging it? I would surmise that this rose to the level of a treaty obligation …and might it have required a referendum.

Where are our lawyers?

Ireland is now in sore need of committed patriots.

Interesting gossip out of Germany today that Greece is going to be given funds from the EFSF to buy back their debt i.e. a backdoor restructuring. I haven’t heard much colour on the idea but initial thoughts are positive I have to say.

Coherent thinking on any problem in Ireland economic or otherwise, is continually hobbled by cronyism. Politicians having to be mindful of what the friends, colleagues and backers think has trumped policy over empirical facts every time.

From the very start the structure of NAMA was such that it could not rule out conflicts of interests between advisers and debtors, and advisers who became debtors (and vice-versa). However, such ambiguities are perfectly acceptable to a political elite which insists that taking another run at an iceberg will push it under the water.

As the levies and tax changes kick in this month, employees will have less to spend and that does not bode well for the service sector, and an increase in unemployment is inevitable (noise of emigration valve bursting).

The public, shamefully, still do not know the full facts of the lead up to the bank guarantee and short of an new government making an inquiry, may never know why the citizens have to pay so much to save so few.

@Dr. D
Tax competition is something that is hugely important for European citizens and for European governments. The fact that it’s a core value for the EU is enshrined in EU treaties. It may be a fact that some individual states wish it were otherwise, but it isn’t.

If tax competition is prohibited then governments will have a framework within which to dominate their citizens’ lives – even more than they do now. Almost all governments understand this very clearly.

Tax competition is important because it gives some protection to the citizen that the governments stays honest. Tax competition is important because it limits the ability of governments to run everything in the citizen’s life.

As someone on a barricade might say “Vive la competition!”.

Of course, if we had honest self limiting government then this wouldn’t be such a problem. I won’t hold my breath waiting for that.

@Dominique.
re I just hope for your sake that Axel Weber will not succeed Trichet at the ECB (in which case you would learn to love Trichet).

You are wrong in this. Weber is an original “Iron man with the wooden head”.
It is far easier to contend with somebody who directly opposes you than somebody like Trichet who potrtrays himself to be reasonable but is a weakling playing the cards of the iron man all the time.