Gormley On the Guarantee: The McWilliams Option

John Gormley on tonight’s Vincent Browne show:

Gormley: We had already discussed it for about a week on and off, we had discussed this. Some people, and I took the view too, that maybe nationalisation was the way forward. You have to remember the context.

Vincent Browne: You didn’t think that you as leader of the party that was in coalition government with Fianna Fail, you didn’t think that maybe you should get out of bed and go in to the Department of Finance where these discussions were going on.

Gormley: No because we had already discussed it Vincent. That’s the whole point

Vincent Browne: You went back to bed?

Gormley: Well, of course. I said “What is the option?” I remember speaking to Brian Lenihan and said “What option are we going for?” In fact, I can tell you what the exact words I used were “Are we going for the David McWilliams option?” That’s what I said on that particular evening. And he said yes. And as far as I was concerned that was the best option as I understood it at that time.

Vincent Browne: Because David McWilliams told you.

Gormley: Well, he is a person that I think a lot of people have respect for and we had discussed it. When I had mentioned nationalisation, he said “no, that’s not a good option at all.”

Vincent Browne: How come there was a bill presented to Brian Lenihan and Brian Cowen that night? There was a bill already drafted for the nationalisation of Anglo Irish Bank. How come that happened if nationalisation wasn’t on the table over the previous weeks or months?

Gormley: Well, that’s an interesting point because it’s the one that I have gone for myself, so I suppose the Department of Finance had just put that one in, just in case we didn’t decide for the guarantee.

The McWilliams Option might sound like a Robert Ludlum thriller. Unfortunately, this wasn’t fiction. This is a senior cabinet minister’s description of how the most important economic policy decision in the history of the state was made.

67 thoughts on “Gormley On the Guarantee: The McWilliams Option”

  1. This story again highlights the Irish system of people out-of-their-depth responding to a crisis, only when it has become a dire one.

    The panic set in, in the last 2 weeks of Sept even though the international credit crunch had broken out almost 14 months before and the US subprime crisis had hit the headlines in early Feb 2007.

    It was only after the Lehman collapse that woefully compromised Big 4 accounting firms were asked to report on the likes of Irish Nationwide.

    Days before the Sept 29th meeting in Government Buildings, the US Treasury secretary had literally got on his knees to beg the Speaker of Congress to support a $700bn bailout for Wall Street.

    Still, the delusionists at the Irish Central Bank were singing the mantra of ‘resilient’ banks as if the faltering property market across the developed world and in Ireland, would make a miraculous recovery to save the banks and developers who had been unable to pay interest on huge loans for more than a year.

    It’s easy to be wise after the event but on Brian Cowen, I did dissent from the cooing of May 2008 and I would compare his stewardship in Finance and up to Sept 2008, as comparable with the style of George W. Bush.

    It would politely be termed ‘disengagement’ but I would term it laziness and boredom with the process of policymaking.

    The small number of meetings with the hapless financial regulator, shows that the intelligent political leader wasn’t motivated enough to respond to signalls flashing red for more than a year, in an economy overdependent on the property sector.

    So there was a Bill ready to nationalise Anglo on Sept 29th, but at that point, nobody in Merrion Street had a clue as to its exposure.

    Fintan O’Toole and others have used the Trichet-Lenihan phone call a week before, as a reason to spread the blame to the ECB for the blanket guarantee.

    However, it’s clear that it was decided that there should be no prior consultation with the ECB, the Eurogroup or the EC on the issue.

    It was akin to a child not consulting a parent because the response would be unwelcome.

    So on Sept 30, 2008, there was a sense of bravado that we had pulled a stroke on the rest of Europe and the likes of the British chancellor of the exchequer and Chancellor Merkel, were left fuming.

    David McWilliams bragged that there would be a big inflow of funds from other European countries.

    No other Eurozone country guaranteed existing bank debt and Denmark was the only one other country worldwide to do so during the crisis.

  2. Craggy Island.

    The whole ‘Celtic Tiger’ phenomenon was based on the notion that government should stand aside and let the entrepreneurs show them how to run the economy properly.

  3. At the time the guarantee was the lesser evil compared with nationalisation, the guarantee was a play for time that assumed some level of solvency.

    Gormley’s position was valid based on the advice at the time within the Department. Unfortunately the advice was being provided by deluded fantasists.

    He was right to go back to bed, you’re not going to get much out of a crash course in financial servicing in the middle of the night with hysterical bank advisors.

  4. I know the minutiae of this are fascinating. (I have this image of Minister Gormley in his nightcap and night gown poised to run across Dublin to Govt. Bldgs. like Wee Willie Winkle rousing the citizens.) But, perhaps, we should focus on Karl’s final point about how policy is made – and not just on how this portentous decision was made, but on how all public policy is formulated, decided, enacted and implemented.

    Public policy in any area is formulated, oft in the context of vague Cabinet approval, by a cabal comprising a minister, special advisers and senior department officials (with inputs from god knows what special interests and, occasionally, from tame external consultants), drafted in almost final legislative form, puffed energetically by the government spin-machine, subjected to totally ineffectual scrutiny in the Oireachtas and, finally, whipped through relying on the ‘payroll vote’ and the backbench lobby fodder.

    The mad scramble at end-Sep. 2008 was the inevitable outcome of a long sequence of bad policies enacted in this way and having an increasingly damaging cumulative effect. As the late UK PM, Jim Callaghan once put it, ‘the sky was dark with chickens coming home to roost.’

    Yet, despite all their honeyed words about political reform, none of the main factions have effective proposals that would subject this process to the scrutiny it requires. Yes, there are proposals about strengthening the powers of Dail Cttees and about bringing the heads of legislation before these Cttees in advance of detailed drafting, but this is all for the optics and would do absolutely nothing to reduce the executive dominance that governments enjoy (and abuse). And it would do absolutely nothing to prevent a repetition of the flawed policy-making that got us into this mess.

    In the areas of fiscal, macroeconomic and financial/banking policy, where, ironically, the factions are advocating major reforms to the budgetary process, it probably doesn’t matter very much, because policy in these areas will be determined by the Troika for the next 3 years – and by the European Commission/Council(?) after that. But in all other policy areas it will be business as usual – irrespective of who is elected to govern.

    Until some simple, but far-reaching, reforms are made in Dail and Cttee procedures, we are at nothing. For example, this ‘corporate sole’ nonsense for ministers would be abolished and they would be forced to pitch up (with their advisers, senior officials, tame consultants, etc.) to present and defend their policy proposals before appropriately empowered and resourced Oireachtas Cttees. These Cttees would be able to invite/summon/commission expert advice, testimony and evidence to contest the minister’s proposals. In turn, the minister and his/her team would have an opportunity to rebut the critique of the Cttee’s experts. The Cttee members would have opportunity to question the minister and his/her team and the Cttees experts. There would be further opportunity for rebuttal and counter-rebuttal when the Cttee would withdraw, form a view on the proposals and communicate its findings to the Dail.

    This won’t stop stupid policies being enacted – a government with a Dail majority will still be able to get its way – but the media and the public will be able to see the gaps, and it might minimise the incidence and severity of such policies.

    This is the kind of reform voters should be pressing on Dail candidates, but the parties will avoid it like the plague. Instead they are advancing complex menus of reform, most of which will require constitutional amendments. They are confident they will be able to kick the whole bothersome exercise into the long grass.

  5. @ all
    From now on the Blanket guarantee of Sep 2008 should be given its more accurite title.
    “The David McWilliams option”
    I have been saying that that is what happened for about a year and a half.
    I know it was fairly shocking but was also well documented and even though I made the case using McWilliams own articles and his book, most people on this site dismissed it as bluster.

    Unfortunately even if David McWilliams were to spend the rest of his life coming up with brilliant strategies to help Ireland out of this I still don’t think he will undo the damage his option has caused.
    There were those in the dept of finance that night that advised just guaranteeing AIB and BOI.
    If this was done and Anglo and NIB were let go to the wolves (not systemic by the way) we could have saved 30-50 billion.

    The main reason I thought McWilliams was behind it was because he was actually advancing it as a unique option he had devised up to the guarantee day and on the day after it he disowned it (Lenihans Masterstroke).
    Since then I have heard many politicians and economists demand to know who was behind this plan (most memorably Pat Rabbitte on Prime Time).
    The answer was obvious but very unpalatable.
    The biggest decision in the history of the state was a plan devised and amended almost daily by a maverick Journo.

    The minister decided to ignore a 4 million Euro report and his own Senior civil servants. Lenihan has huge questions to answer.

  6. So is he now saying that David McWilliams told Lenihan et al to Nationalise Anglo and implement a bank guarantee? Something which McWilliam now disputes?

    If that is what he is saying thats a pretty serious allegation for McWilliam to address.

  7. @ Eamonn Moran

    Is it not safe to say that if David McWilliams had been behind this plan….we’d have all known about it immediately after its enactment…He doesnt strike me as the type to keep such things to himself. It was widely acclaimed then, surely he would have taken the glory if it was all his idea.

    Dont you think it’s far more likely that it was the head of the banks’ idea….little liquidity problem there brian, nothing serious but we may not be able to open on monday, that whole lehman pallaver has everything in a loop…why dont u just guarantee the whole lot of it and we’ll be fine in a month or so..from their point of view, a state blanket guarantee was the holy grail…surely they would have pushed and pushed for it. Any other option would have been harder on them, knowing what they knew..

  8. This reliance on friends for critical expert advice is not unusual.

    You will recall that it came out at the Tribunal that Bertie Ahern relied hugely on the advice of Padraic O’Connor of NCB for advice at the time of the currency crisis.

    The fact is that there are no independent voices in the Public Service. The culture is craven and political and a lot more besides.

    At the same time, it should be noted that whereas this was called the “David McWilliams Option” expert advice was sought from Merril Lynch.

  9. It’s nonsense, McWilliams would have hung himself at the time if he was responsible for it..I doubt he could have resisted taking the credit.

  10. @Jarleth
    He was taking credit for it. Thats the point. right up till it was implemented. Go back and read his articles in the lead up to the guarantee and his book.
    Thats why I don’t understand why there has been confusion!
    But you do raise an interesting point about the banks. Perhaps it was the banks who sent Lenny in McWilliams direction?
    Thats why Lenny has serious questions to answer.
    @ Micheal Hennigan
    “However, it’s clear that it was decided that there should be no prior consultation with the ECB, the Eurogroup or the EC on the issue.”
    What makes you think that?

  11. @ Eamonn Moran

    I know the articles you’re referring to, havent the time right now to dig them up again, but I thought he was advocating a guarantee in order to solve a liquidity problem, and it was’nt to be as extensive as the one actually implemented. And to my recollection he didnt really clamour much for credit afterwards so that would make me think his input was minimal. That he threw an idea out there…the heads of some insolvent banks spotted it, realised it was the answer to their prayers and they subsequentl rammed it down our governments throats…that would be my guess on what happened.

    Lets not forget, 2 months prior our Taoiseach was having an all day advice session on the economy from the biggest failures the banking industry has ever seen.

    The suspension of disbelief is great for science fiction movies and the like…but not in this case. On the one hand you have an outspoken journalist with floppy hair…on the other you have the heads of banks who have gotten their way in this country since before we were even a country….I know which one I’d point the finger at..

  12. @ Jarlath

    McWilliams has since referred to the guarantee as being, in his view, only a “bluff”, and that once it stopped working we should have stepped back from it. So it seems like he’s taking credit for suggesting it, albeit he never really intended on honouring it. Not sure how responsible such a course of action as that would have been. My guess would be that the Pottery Barn rule might take effect at that point – you break it, you own it…

  13. @KW

    I tuned to Vincent Browne last night – ….. unlike most in RTE, he continues to press the issue of conflating Banking system debt with Sovereign debt … far too much regulatory capture by the political class within RTE.

    The Robert Ludlum analogy is apt – far as I recall the ‘bought barrister’ in his most famous ‘midnight series’, who sacrificed the heroine (read sovereign) ended up with those who bought him (dodgy capital interests) – driving at high speed over a cliff – taking all and sundry with them.

    The populist party taking advice from the arch-populist economist – something really stinks – and it ain’t just the garlic. Heck, I’d take advice from Ghensis C. G. Khan before I’d seek advice from this egoistic arch-populist koining_it ekonomist.

    Now – you might address the emerging Black Hole re ECB/ICB 140 billion fire sale and how much this will add before we DEFAULT on the lot of them ….. I would like to have a reasonable estimate of how much we will be DEFAULTING on ….. so would Patricia the Sovereign_in_Exile.

  14. @ Eoin

    I’m not disputing the fact that he may have thrown such a suggestion out there. Based on his belief that the banks were illiquid. But the parties involved in deciding and implementing it were Lenihan, Cowen, a few nameless civil servants and the heads of the banks….

    …are people really trying to suggest that David Mcwilliams was sat in a chair stroking a cat saying sign the papers Brian…while the heads of the banks were tied together screaming stop, for the love of god we’re insolvent, you’ll ruin the country!!

    If his crime was suggesting it, I dont think he did much wrong, based on what he knew at the time it wasnt that off the wall…based on what the banks knew it was treason and inexcusable….and of course Lenihan and Cowen knew nothing. A pair of docile cows.

  15. @ Jarlath

    to be clear – i don’t think you can apportion too much blame to a suggestion made by private citizen who was asked for his opinion in a time of need. However, it should perhaps be used to show (a) independent commentary/criticism of the government decisions has been far from perfect itself and (b) McWilliams is very often feted up and down the country, and in his triple dose of weekly newspapers opinion pieces, as being a genius who can do no wrong. He quite clearly can, so when he suggests repeatedly that we should leave the eurozone or default on all of our debt, its not a bad idea to think about his previous big bang suggestion.

  16. The Challenger disaster is probably the most studied examples of a flawed decision making process that resulted in a catastrophe. It was the Physics Nobel Prize winner, Richard Feynman, who graphically demonstrated the technical, and simple, cause of the disaster

    http://www.youtube.com/watch?v=8qAi_9quzUY

    Of course there is much more involved in arriving at an understanding of the lacunae in the human decision making processes that led up to the ignoring of the simple technical cause of the disaster. I am sure that the economist bloggers on this site can come up with the ‘technical’ flaw or flaws in the blanket guarantee option chosen by government. But the human factors underlying the generalised decision making process involved, described by Paul Hunt in his comment, are more complex and more difficult to unbundle.

    Daniel Kahneman, Economics Nobel Prize winner, and Gary Klein represent the opposite ends of the spectrum on human decision making. They have collaborated together and published a very good article in 2009 on the common ground between the ‘intuitive’ and ‘heuristics and biases’ approaches to human decision making

    Conditions for intuitive expertise: A Failure to Disagree. American Psychologist, Vol 64(6), Sep 2009, 515-526.

    http://psycnet.apa.org/journals/amp/64/6/515/

    In their view true experts, it is said, know when they don’t know. However, non-experts (whether or not they think they are) certainly do not know when they don’t know. Subjective confidence is therefore an unreliable indication of the validity of intuitive judgments and decisions. There seems to have been an over-weighting of the non-expert i.e. the politicians, views on September 30th 2008. They also point out that although true skill cannot develop in irregular or unpredictable environments, individuals will some-times make judgments and decisions that are successful by chance (McWilliams?). These “lucky” individuals will then be susceptible to an illusion of skill and to overconfidence, and that the financial industry is a rich source of examples according to Kahneman and Klein.

    Philip Tetlock is a psychologist at the University of California, Berkeley. He studied the accuracy of 284 people whose professions included “commenting or offering advice on political and economic trends.” By 2003, he had accumulated 82,361 forecasts, which provided him a database to evaluate. Based on over 20 years of research he argues that there is an inverse relationship between what works best in forecasting and what works best in the media. He divides the experts into two broad classes – ‘foxes’ and ‘hedgehogs’. Foxes draw on many ideas and sources of information; hedgehogs interpret the world using their favourite theory or dogma. Foxes are more tolerant of ambiguity and uncertainty than hedgehogs, who tend to be confident in the rightness of their view of the world. Yet it is the dramatic, single-minded, combative hedgehog ideologue who makes for the best TV viewing on programmes such as Tonight with Vincent Browne, for instance.

    http://repository.upenn.edu/cgi/viewcontent.cgi?article=1056&context=marketing_papers

    The information gathering strategy followed in September 2008 could very easily be characterised as following the rule of thumb “talk to four foxes, one pessimistic hedgehog and one optimistic hedgehog. Add the forecasts, divide by six to get the mean, and then use the mean and the six forecasts to calculate the standard deviation”. Is this what happened on September 30th 2008, aside from consideration of any of the Feynman type of ‘technical’ factors that explain the disaster?

  17. @ Eoin

    Again, i think it is worth saying in the mans defence he was not partial to all the facts. He made that suggestion based on his belief it was a liquidity problem. I can apportion very little blame to him for putting the idea out there, when those tasked with deciding the matter were either fully aware of the facts or shamefully ignorant of them.

  18. Well, can I just say…. David’s latest article here

    http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-before-we-sell-the-country-we-should-ask-the-people-2542309.html

    This is not only an option, such a referendum is the only democratic tool available to the citizens of Ireland, and there is a need and a ethical duty to make use of this now.

    IMHO We have to have this referendum now.

    I ask all of you to support this and bring forward the case to ask the people of Ireland.

  19. Whatever about McW’s ideas, he didn’t get paid for them. Surely the revelation in Lewis’ article concerning ML’s suppressing of their research should be part of the debate? They certainly did get paid!

  20. Typical blame game. David McWilliams did advise Lenihan on the bank guarantee as a TEMPORARY measure to calm the situation. When settled, separte the trash ( anglo and nationwide) from the relatively good banks.

    I nearly chocked on my pork chop(cheap cut) yesterday when I heard Michael Martin,s comment on how no alternative view was out there when everything was rosy. Wake up everyone. Bertie Ahern told McWilliams and Morgan Kelly to stop crippin and go and commit sucide. You,d swear Martin was on Mars for the last 13 years. I still can,t understand how Fianna Fail even have 15% of a vote. We Irish are not very smart sometimes.

  21. @ Jarleth

    “And to my recollection he didnt really clamour much for credit afterwards so that would make me think his input was minimal.”

    And the fact that a member of cabinet referred to it as the “David McWilliams Option” and it was completely understood by Brian Lenihan does not make you think differently?
    That McWilliams had on the days before had advised this was the way to go to Gormley in a meeting.
    McWilliams realised very soon after the guarantee that he had either been used or that the government never intended to follow through.
    I agree with Eion when he a year later claimed it was a bluff it was an act of disassociation.
    If any of the media had realised that he was the mastermind they might of then asked why he subsequently ran a mile from it.
    But they didnt.
    On the biggest economic issue of the country since the founding of the state the media in general missed the big story even though it was in plain view due to the constant public comment from the main protagonist.

    I believe they like many economists could not and did not want to believe that the biggest decision in our states history was the result of a quickly thought up plan by a maverick economist/journo who offered Lenny a way out of a maze when he probably didn’t think one existed.

  22. I note that it is taken as gospel in this blog that the Sept ’08 guarantee was almost solely responsible for our current plight. I note also a corollary that also seems to be accepted wisdom, that all would have been oh so much better if only we had nationalised the whole lot. Labour (rather unsuccessfully) are making this the central theme of their election campaign.

    Now let’s have a reality check. Ireland is in deep doo dah. Its banking system totters on the verge of collapse. Its fiscal imbalance seems almost unsurmountable (certainly won’t be fixed by getting more efficiency in admin).

    This chronic and possibly terminal disease had its origins well implanted before September ’08. We didn’t recognise at the time how chronically ill our budgetary and financial system was but even if we did I contend that we did not miss any wonder cures and whilst the medicine we did take has proved ineffectual any other potion would have been equally impotent.

    As to the real MOF being McWilliams, that is an unforgivable blemish on Lenny’s record. Luckily McWilliams was sidelined at some stage or we would by now have left the euro and enacted many other lunatic stunts.

  23. I don’t buy the fact that McWilliams was responsible for the bank guarantee. McWilliams was an outsider who made a suggestion to put a temporary stop to the floodtide. That is all. Responsibility and accountability must reside with the Governmnet in the first instance, The Dept of Finance, the Central Bank and the Financial regulator.

    McWilliams others proposals, to sack the boards and use the time to sort out the banks was not followed.

    MH is right in his comment

    So there was a Bill ready to nationalise Anglo on Sept 29th, but at that point, nobody in Merrion Street had a clue as to its exposure.

    Nobody still has a clue to the State’s exposure. I have seen no clear analysis of the loss to the State from the banking disaster. Not even a clear methodology for arriving at the loss.

    To me this thread was more about getting a dig at McWilliams than about attempting to produce solutions to the crisis.

  24. @Jarlath

    A pair of docile cows.

    If only… From the Sunday Tribune:

    Cowen under fire for plan to ‘stuff’ state boards with cronies

    Taoiseach Brian Cowen and his six remaining government ministers made a collective decision at last Tuesday’s cabinet meeting to fill all vacancies on state boards before they leave office.

    […]

    A comprehensive list of all state boards was compiled for the cabinet by civil servants in each of the 15 government departments and the ministers then decided to fill any vacancies in the period between that meeting and the new government coming into office.

    […]

    The government faced the wrath of opposition TDs such as Fine Gael’s Leo Varadkar in recent weeks after it emerged that it made 90 appointments to state boards during the Dáil Christmas recess. A further 48 appointments were made by the government in the 10 days from 14-25 January. Of those 48 appointments, 25 of them were made by Cowen.

    These are people whose only noteworthy attributes are thick skin and brass necks. €6,000 to move Harney between two terminals of Heathrow, jaunts to 5 star hotels in the US on the government jet, fake constituency jobs for friends and family, stipends for their fellow travellers etc etc, there is no depth these people won’t stoop to. They not only are bereft of any principle, they make it impossible for anyone with principle to succeed.

    Disgust is the only reasonable feeling to harbour for creatures such as these.

  25. On 26th January, 2011, the following written question tabled by Joan Burton was responded to by Minister Lenihan

    JB “asked the Minister for Finance to whom he placed calls externally
    to the Department of Finance or the Department of an Taoiseach on the night of 29 September 2008 and early morning of 30 September 2008, to seek advice in relation to the bank guarantee or other options for resolving the banking crisis; and if he will make a statement on the matter.”

    And the response from Minister Lenihan was

    “I did not make any external telephone calls on the night of 29 September and early morning of 30 September 2008 to seek advice in relation
    to the bank guarantee or other options for resolving the banking crisis. However, I did make telephone calls to the following people to advise them of the bank guarantee:
    Irish Ambassador to France
    Ms. Christine Lagarde, Minister for Finance, France
    Irish Ambassador to UK
    Mr. Alistair Darling, Chancellor of the Exchequer, UK
    Monsieur Jean-Claude Trichet, President, European Central Bank.”

    http://debates.oireachtas.ie/dail/2011/01/25/unrevised2.pdf

    So if Minister Lenihan did make an external call to John Gormley on the night of the 29th or early morning of 30th, it was not to seek advice. Maybe John was just having a dream in which his advice was sought out by others who valued his input.

  26. Ideas stand or fall on their merits. The speaker is rarely important.

    A bank guarantee was not a bad idea; a bank guarantee that guaranteed all bank liabilities was. Neither was a good idea if there was no plan what to do next.

    NAMA was cobbled together as the ‘what to do next’, but by the time it was published the stroke it was intented to effect had collapsed.

    No resolution mechanism was produced during the lifetime of the guarantee.

    So the guarantee itself was totally pointless. Continuing guarantees are likewise. The Irish Central Bank can provide unlimited ELA, it seems. That should have been sufficient to resolve all the banks, split them into good and bad, merge, hive off, recombine the pieces, pay off whoever needed to be paid, allocate any losses that can be allocated.

    Long-running liquidity crises are always solvency crises for banks. The Irish banks by September 2008 were terminally illiquid – even before Lehmans… Anyone claiming that they thought it was just a liquidity problem is too dishonest or too stupid to take seriously.

    Leaving the euro is pointless without default on debt. Default on debt is possible without leaving the euro. They are separate issues.

    No idea is useful unless it addresses the deficit – either continued borrowing or an end to borrowing.

  27. @Gerry Fahey

    Karl Weick’s piece in ASQ Administrative Science Quarterly on the Mann-Gulch disaster is also useful …

    Firemen & women are taught not to drop their tools [which are heavy] – caught in the middle of a bush fire – those who kept their tools – fried and died – the tools slowed them down: some of those who dropped them and ran quicker – survived.

    Lesson: We should have dropped these ‘FF/PD fools’ many moons ago – and we might have survived ….

    What are we doing now? We [mostly fools] are selecting more fools …. to run a land that is already burnt … to a wasteland.

    More please …..

  28. @Gerry Fahey

    … and substitute dodgy banks for tools ….. simple enough lesson for any high infants graduate …. not too late …. a bit of spring growth still possible (-; and the madra rua might yet run free ….

  29. @ Eamonn Moran

    My impression from the information available, was that the heads the ECB, Eurogroup and Ecofin were notified of the fait accompli on the morning of Sept 30th.

    I have seen no claims that consultations were made on the guarantee.

    @ Georg Baumann

    Well, can I just say…. David’s latest article here

    This is not only an option, such a referendum is the only democratic tool available to the citizens of Ireland, and there is a need and a ethical duty to make use of this now.

    This is absolute garbage.

    The people who are advocating this decided not to stand in the general election and the brave souls now want a referendum after the election!

    They ran out of time!

    Maybe we could make the Eagles ‘Hotel California’ our anthem too as they have had a toxic addiction to referenda.

    Last thing I remember I was running for the door
    I had to find the passage back to the place I was before
    “Relax,” said the night man, “We are programmed to receive
    You can check out any time you like but you can never leave”

  30. This blog post constitutes another cheap effort by Karl Whelan to pin everything on David McWilliams.

    McWilliams has already said that he supported a bank guarantee and advised to that effect on September 28th. There’s no need to reference John Gormley here because here’s David McWilliams Sep 28th 2008 SBPost article in which he advocates a guarantee but not a nationalisation. It’s worthwhile noting his stated reasons here:

    While, in the longer term, Irish banks have bad debts/asset problems due to excessive lending to property, the problem that will drive them to the wall is short-term liquidity. This is what the state must rectify.

    McWilliams is clearly operating from the perspective that the banks are in some way solvent. Note also that even at this early date, McWilliams is implicitly against both taxpayer funding of the banks and NAMA

    If we take second-hand, discredited ideas from abroad, such as a toxic fund[i.e. NAMA] or, worse still, nationalising a bank, we will fail…..

    There is another reason for not nationalising, and it is taxpayers’ money. Once you start using taxpayers’ money, you have to be careful. The lesson from the US in the past week is that using taxpayers’ money is unsuccessful and deeply unfair.

    It’s clear that McWilliams was for a bank guarantee that would get the banks past their short term liquidity crisis, but not for anything more substantive.

    His very next article on Oct 5th urges write downs on debt, and on Oct 15th he advises against trusting the Bankers and one month after the guarantee, by Oct 15th he had already spotted the major problem with the Government’s implementation guarantee; that it had guaranteed Anglo at the expense of AIB and Bank of Ireland.

    This means that, if one bank goes, they all pay. The clause casts a huge cloud over the whole system because it implies that the ability of the strongest banks to lend over the coming years will be hamstrung by the bad debts of the weakest banks.

    And he outright said that the government had made a hamfisted job of the guarantee(and hints at why).

    For the economy in general, the worst aspect of penalising all the banks for the sins of one is that it smells and looks like the discredited Japanese model. It means that we have tied the whole banking system up in knots. This can only slow down any recovery of the banks.

    It would have been far better to have followed the Swedish or Swiss approach, by sticking to the three-phased programme, weeding out the guilty while recapitalising the system using government preference shares.

    Now we potentially have the worst of all worlds.

    In any event, here’s a recent interview where McWilliams gives his own opinion on the advice he gave to Lenihan. He now says that he “regrets answering his door to Brian Lenihan”. The substantive quote is the following:

    McWilliams said he believed a guarantee meant you lend banks the credibility of the state for a fixed period, with huge conditions attached. However, he added, “What the government seemed to do is they gave the banks the credibility of the state with no conditions. And then in the two year period during the guarantee, they did nothing, or very little”.

    It’s clear that McWilliams advocated _a_ guarantee; he didn’t advocate _the_ guarantee that the government actually implemented. There’s a substantial difference , the principle one being that McWilliams was clearly not the architect of the guarantee which was actually implemented by the Government. The record makes this clear.

    This is all a matter of public record, with the articles all up on McWilliams’ own site and elsewhere. I don’t know why anyone needs a soundbite from John Gormley to make a post about this.

  31. @ Eamoon Moran

    The fact that John Gormley refers to it as the mcwilliams option makes me even more confident mcwilliams had no input bar floating an idea out there…because i’d say the extent of gormley’s involvement with the whole thing was to read about said idea in the paper. and when Lenihan, Cowen et al were patting him on the head saying it was the right option, i’m sure they used mcwilliams name in the process…just as the heads of the banks probably dropped his name too in order to make Lenihan and Cowen more comfortable with the idea.

    “I believe they like many economists could not and did not want to believe that the biggest decision in our states history was the result of a quickly thought up plan by a maverick economist/journo who offered Lenny a way out of a maze when he probably didn’t think one existed”

    Bit over the top i think…Minister for Finance, Taoiseach and bank chiefs lock themselves in a room for hours on end…..they come out waving a guarantee in the air that subsequently bankrupts the state…..and you think the machiavellian genius behind it all is some celebrity economist who wrote an article in the paper. The idea was out there…and i’d say the bank chiefs lit on it like children on chocolate….forced an incompetent and ignorant governments hand…and thus we are where we are.

    I have to keep calling them bank heads or bank chiefs cos i dont really know their names off the top of my head….they are away now in other jobs, or playing golf…..pretty much anonymous and happy out no doubt…..and we’re here discussing the infamous david mcwilliams…that dastardly man…can you not see the wrongness in that?

  32. @ Jarleth
    “The idea was out there”
    No it wasnt. This was McWilliams idea.
    It had never been done before. If you read his articles he describes the need do something unique that has not been done before.

    Jarleth the reason that the story sounds so ridiculous to you is because the idea is ridiculous. But that doesn’t mean its false.

    The reason people have been so slow to come around to it is that it is ridiculous.
    Just so people know I am not saying that The Guarantee was David McWilliams fault.
    I am saying that he came up with an option that was not other wise on the table. And that we went for it. And since we went for it Many Politicians now believe (even some in Labour who voted against it) believe we are morally obliged to pay back all the bank debt.
    I think another option on the table of Saving only BOI and AIB would have saved taxpayers a lot of money.

  33. Obsessivemathsfreak.

    Once you give a blanket guarantee to all debtors and creditors of all the financial institutions it has certain legal consequences.
    Mcwilliams said it was something that had not been done before and would cause deposits to flood to Ireland.
    Unfortunitely the reason it had not been done before are now very evident.

    That was McWillliams Plan.

    Once you come up with a plan, you argue for it, and then the minister comes knocking on your door to use it and legislation is created to enforce it, it is not good enough to then say one year later “it was only a bluff”

  34. @ Eamonn

    I agree with you, always thought that was the preferable option, even then.
    But so what if he came up with the idea? He’s entitled to suggest things, wrong or right. The entirety of the fault lies with those who made the decision. Especially those who were in receipt of all the facts. If you are only saying that he was the originator of the idea, then i agree with you, but i dont see that as much of a crime. Those who took his idea and used it to f** up the country are the criminals. In my opinion he had zero influnce other than suggesting it. It suited the banks purposes perfectly and they demanded it.

  35. “This is a senior cabinet minister’s description of how the most important economic policy decision in the history of the state was made.”

    Does anyone really think any of them even bothered to read up on / were capable of understanding the meaning and context of combinations of words like “senior unsecured creditors”.

    At the time there weren’t votes in it, so why would they bother?

  36. “This blog post constitutes another cheap effort by Karl Whelan to pin everything on David McWilliams.”

    Hmmm. Living up to his name, OMF seems a bit obsessed with David McWilliams and what he thought when. Personally I don’t much care what David thought and when any more than I care what Fintan O’Toole or Vincent Browne or other influential commentators thought. And this is, to my knowledge, the first time I have mentioned David in a post on the government guarantee.

    McWilliams was never a member of our government, so he’s not responsible for any of their decisions. Anyone who wants to “pin blame” on David is being silly. However, I think there is something to be learned from this story about how the Irish government makes important decisions and why it often gets them wrong.

  37. Acually Karl your last comment has made me think about this again. It could be that when one of them said “Are we going for the David McWilliams option?” and the other one said “yes” at least one of them might have thought they were discussing what clothes, or hair style to use for the press conference.

  38. That was McWillliams Plan.

    But was that the plan that was actually carried out? Has the Irish Government been following David McWilliams’ diabolical scheme for the last three years? Or did they instead take his initial suggestion of a guarantee and then proceed to make a complete cock up of it, against advice he himself had offered. If the latter, how much responsibility can McWilliams realistically bear for it?

    Labeling the guarantee as McWilliam’s plan conveniently ignores the fact that the man quite literally did nothing other than suggest it to the government. He had none of their data, knowledge, no prior meetings, and after the decisions was made was never again consulted about it. Again, he has never seen the inside of a government building.

    Now, there is a separate issue about whether the bank guarantee was _ever_ going to work at all; whether—government cock up or no—McWilliams idea would always have failed. But conflating that issue with the authorship of the banking guarantee is in my view being disingenuous. McWilliams suggested _a_ guarantee, he did not concoct _the_ guarantee which was implemented, or the decisions which followed it, and in fact argued against most of them.

    I note here that the raising of this issue seems to have coincided with McWilliams’ joint venture with other alternatively minded economists on thepeopleseconomy.com. Discrediting McWilliams on this issue would of course vicariously impact the credibility of the cadre there who argue for debt writedowns and/or defaults. That’s if you don’t believe in coincidence of course.

  39. “Leaving the euro is pointless without default on debt. Default on debt is possible without leaving the euro. They are separate issues.

    No idea is useful unless it addresses the deficit – either continued borrowing or an end to borrowing.”

    But if a government is issuing its own currency the deficit and borrowing are not connected. Sales of government debt, whether new issues or by the central bank, become operations to drain excess reserves from the banking system to prevent the overnight rate from falling to whatever support rate the government pays on excess reserves.

    More: http://bilbo.economicoutlook.net/blog/?p=11218

  40. “I note here that the raising of this issue seems to have coincided with McWilliams’ joint venture with other alternatively minded economists on thepeopleseconomy.com. Discrediting McWilliams on this issue would of course vicariously impact the credibility of the cadre there who argue for debt writedowns and/or defaults. That’s if you don’t believe in coincidence of course.”

    This fella is great gas, isn’t he? The people’s what .com?

    I, for one, can put hand on heart and say that I have never heard of this website or its, em, cadre. But I’ll pop over and have a look now.

  41. Gormley now arguing that everybody was for the guarantee, that Labour were only making technical objections. He too is part of this grand self deception that the Sept 08 decision is the cause of all our woes.

    The fact is that the ECB/EU have not allowed us to default on senior bondholders. No other course would have softened them up on this score.

    Consider Anglo and say that we had nationalised and not guaranteed. The only difference we would now be facing is that we might have more unguaranteed seniors. Everybody seems now to be agreed that we should try and convince the ECB/EU to allow us to default. Would our case be stronger if we had lots of this stuff to spread the “burden sharing ” around or as we currently stand the relevant constituency is quite small. Not clear to me in which scenario the ECB/EU would be more prepared to budge.

  42. Had a look. It’s a nice site — congrats to David and others involved. Contributors are all interesting people. Far glossier than our own dull little site. But not a whole lot of content as of now.

    Anyway, I’d encourage folks to take a look. The videos seem pretty good.

    thepeopleseconomy.com

  43. I had a look. I like the fact that where I expected to find an “About This Site” link there was instead “Meet The Experts.” If you’ve got it, flaunt it.

  44. Just had a quick look and have to say it looks overly emphatic with contributors presenting opinions as fact.

    “The Eurosystem uses a single currency. Ireland can’t print more euros unless the European Central Bank lets it.” I’m not so sure about that if push comes to shove – which is what is going on here.

    A video tells us that deposits are different to “the debts of the banks” because the latter are between the lender and the bank and nobody else. WTF?!

    Its glossy Karl, but I wonder what effect it will have on the quality of debate.

  45. I did not realise D Mc Williams had so many members of his family contributing to this site !!!

    D Mc W was in favour of a Guarantee for everything in the Banks and he cannot walk away from that with all sorts of qualifications after the event. Anybody with a Brain would have told Lenihan to Guarantee the Depositors full stop ……………

  46. This was John Gormley getting his story out out first before the next government publishes its account of what happened. Nothing like getting your story out first.

  47. @grumpy

    “Its glossy Karl, but I wonder what effect it will have on the quality of debate.”

    It looks like a worthy effort to explain the current approach to the banking crisis in terms that are more accessible to a general audience, which might help the quality of democracy and increase public engagement (rather than despair).

    Thank reason that irisheconomy.ie is likely to remain above such crude populism, staying focussed instead on the critical issues of the Croke Park agreement, opening up protected sectors of the economy and the awful injustice of a carbon tax.

    Seriously I think TPE will be a long time getting a group of contributors as engaged (and as informed) as this site has managed to and glossiness can get tiring very quickly. Threading would be welcome here though, along and registration and post editing it genuinely does improve the quality of debate (and the rapid editing of ones slightly overheated postings or spwwling mistakes). Perhaps TPE will inspire some video blogging here too, it is a powerful incentive to condense and refine arguments.

  48. Cowen and Lenihan were responsible for the guarantee and even if Patrick Neary had spent the whole evening of Sept 29, 2008, singing his mantra of ‘resilient’ banks, it would not matter.

    What we had here is one political leader who had been a senior minister for more than 11 years but during those good years, Cowen had no experience of making what could be termed profound decisions with serious consequences to consider on the upside and downside.

    It’s for example said that leaders who have experienced war themselves, tend to be more cautious about committing their young to war.

    In Ireland there is still this legacy of the easy times where people who have never made a serious decision in their professional lives, can recommend collapsing all the banks, defaulting on debt and exiting the euro, without having to explain how the economy could remain working during the transition to the devaluationist’s Utopia.

    The approval by Iceland’s parliament on Wed of a new Icesave deal with the UK and the Netherlands, shows that it’s not easy for a country to draw a line under its debts, despite the morality of the issue.

    There maybe be another referendum there and as for the crackpot proposal for Ireland to have one, it’s not difficult to imagine the damage that could be caused to the country by a motley cocktail of deluded high-earning journalists, anti-abortionists, Bolsheviks, anti-European militarism Sinn Féiners and modern day cargo-cultists awaiting manna from heaven, from a European fairy godmother!

  49. Btw, NAMA has announced its repaying €250mm in bonds to the banks as a result of the sale of the Montevtro Building owned by REO/Treasury. Could NAMA actually be starting to work??

  50. @Mr. Bond,

    I’m sure they have a fair amout of stuff that has an LTEV greater than the haircut acquisition price and can be realised close to that level. There still have to be questions about the extent this applies to the whole portfolio, how long they might have to hold stuff to realise anything close to the LTEV and the liquidity of the Irish market to sustain big off-loads.

    However, I expect its portfolio is looking far healthier than the stuff the German, French, Belgians etc have ‘warehoused’.

  51. @Karl,

    “However, I think there is something to be learned from this story about how the Irish government makes important decisions and why it often gets them wrong.”

    It’s not just ‘important’ decisions, Karl; it’s all decisions. This was the point of my obviously excessively long comment this time yesterday. And yes, ‘learning’ about this is necessary; but it is not sufficient. Doing something about it is what is required.

  52. @ Bond. Eoin Bond

    Good news and even though the UK commercial property outlook is a bit iffy, capital values are back to pre-recession levels, NAMA must have some prime London properties that it can offload.

    BTW, Goodbody’s Eamonn Hughes made the following comment this morning – – “The Irish banks have issued €17bn in unsecured paper to themselves since late January. The bonds are guaranteed which means that they can then repo these with the ECB as collateral. To date, it appears that BOI has issued €10bn of this paper, with AIB on €2.6bn and IL&P on €3.1bn. BOI indicates that the issuance replaces sterling bonds backed by UK mortgages which the ECB no longer accepts, however, the move in general highlights the extremely difficult funding environment for the banks (not that you needed reminding!).

    The bonds are all short duration – to April/May – and get the banks over the upcoming PCAR/PLAR exercises, however, with much political debate presently around the banks due to our upcoming election at the end of next week, being definitive on timelines is fraught with risk.

    On this point of political debate, we note media commentary on an academic paper which indicates that more than half of the Irish bank bonds in issue are held by domestic investors. It is reported that the findings back up a similar exercise by EU, with domestic residents holding €33bn of the circa €60bn in issuance (our Debt Dynamics note last week totted it up to €59.4bn, with €21.4bn unsecured, unguaranteed bonds, then €16.2bn of guaranteed paper and finally €21.8bn of senior secured paper).

    The EU has wholeheartedly resisted any move on senior bondholders (Olli Rehn was again out last night on the topic), but the realisation that domestic residents/institutions hold half of the paper might also make the political rhetoric pause for thought.”

  53. @ OMF

    “I note here that the raising of this issue seems to have coincided with McWilliams’ joint venture with other alternatively minded economists on thepeopleseconomy.com. Discrediting McWilliams on this issue would of course vicariously impact the credibility of the cadre there who argue for debt writedowns and/or defaults. That’s if you don’t believe in coincidence of course.”

    FYI That would not be my intention at all. I went to the site yesterday and found it informative. Also I agree with their central position that a write down/ default is inevitable. All I am saying is that he came up with an Idea that no one else would have had the imagination or ability to argue for which on the night allowed Lenihan to
    1. leave no bank behind (keep Trichet happy)
    2. Keep Cowen Happy (were not f^&*ing nationalising anglo)
    3. keep the bankers happy (socialised any losses)

    But as I say again we now know why it had never been tried before.

    If you are a true capitalist, the move on the night was .
    Do nothing and let the chips fall where they may.
    The losses had already occurred. trying to hide them using fancy tricks has only delayed and exacerbated the extent of those losses.

    off topic.
    Micheal Hennigan.
    Did you see this article?
    http://www.irishtimes.com/newspaper/finance/2011/0217/1224290024801.html

  54. @ Eamonn Moran

    Thanks for that; I hadn’t seen it – – this is where the Ipad comes in very handy, being able to flick through as if it was the print edition.

    It’s good to get some facts as I have said in the past, available data is confusing – – which should make the putative arsonists at least go to the trouble of doing some research.

    I have also highlighted how people with pay-as-you-go pensions can make proposals taht would hit already underwater private pensions.

  55. I’d also have some concerns regarding the decision-making process.

    This article is interesting:
    http://www.thepost.ie/news-features/bowing-to-the-bankers-54486.html

    Journalism like that will help Ireland.
    I’m not sure if the parliamentary oversight is as good as I’d like. After reading the article I certainly have some concerns. Was all the relevant information made available for the ones making the decisions (the parliament – not the ministers)?

  56. NAMA might be an interesting topic, however, discussing its profitability now might not yield that much.

    The profits depend on the price NAMA paid. By the looks of it there is the risk that most Irish banks might become owned by the Irish state. If that happens, then the price NAMA paid for the assets will be irrelevant as the transaction would be between Irish state owned companies & any profit will benefit the state.

    A second reason to discount NAMA profits now is that unless write-offs or provision for losses are also made now in the cases where losses are likely to arise then NAMA will (in my opinion) just be window-dressing. I believe it likely that the majority of the loss-making transfers will be dealt with at a later stage. Hope is eternal, maybe some assets that need a write-down of 80% will recover & that might stop some write-downs to happen at this still relatively early stage.

  57. @Jesper,

    “Was all the relevant information made available for the ones making the decisions (the parliament – not the ministers)?”

    This, precisely, is the point I have being labouring to make. The Dail never has all relevant information available when making its decisions – in this case or in any other. The legislature simply rubber-stamps executive decisions.

    Until this changes there is no possibility of rational, evidence-based policy-making.

  58. @ Jesper

    “The profits depend on the price NAMA paid. By the looks of it there is the risk that most Irish banks might become owned by the Irish state. If that happens, then the price NAMA paid for the assets will be irrelevant as the transaction would be between Irish state owned companies & any profit will benefit the state.”

    Its not a zero sum game between the nationalisaed banks and the state. Equity has been wiped out, and subordinated debt has been heavily haircut, principally because of the transfer losses from loans to NAMA. The chances of senior taking some form of loss have also increased significantly. NAMA is also foreclosing in full on some developers, so their equity in property assets is assumingly being wiped out.

  59. @Paul Hunt,

    if this happens then it is a problem & that would lead me to suggest that a good question to ask politicians would be:

    ‘How will you work to improve parliamentary oversight of the executive?’

    In my opinion even majority governments (single party or coalition) should be overseen by the parliament & for that to happen then the parliament would have to have all relevant information.

  60. @Eoin,

    your objection is valid, if and only if, NAMA turns out to make a profit on balance on the transfer of all transactions from one single bank. Neither of us know the outcome, I have serious doubts about that profitability.

  61. @ Jesper

    yeah, pretty sure i didn’t mention anything about NAMA as a whole making a profit, or what level of their properties would be sold on at a profits. What i did mention was that they disposed of a large property this morning at a profit, and have managed to repay both €250mm of their debt to the banks, and €49mm in loans made by the Minister for Finance. As such, based on those events, it could be working, and its certainly a ‘good’ thing. You brought up the potential negatives of long term unknowns (and therefore a double guess)….

  62. @Jesper,

    “‘How will you work to improve parliamentary oversight of the executive?’”

    We will get into trouble here because economists reside in their own silo and political scientists in theirs. But good work is being on this by the folks at http://www.politicalreform.ie

    They have developed a scorecard to mark the parties’ recent interest in political reform.

    Among parliamentary democracies in the OECD Ireland is at the extreme end of the spectrum in terms of the exercise of executive dominance. This I suspect is something of which many external observers of Ireland are not aware. Governments in hock to special interests are able to ensure the enactment of policies that favour these interests without any real restraint. This goes a long way to explain why we are where we are.

    However, despite their recent – and sometimes very recent – interest in political reform and their presentation of comprehensive and eye-catching menus of reforms, none of the main parties address your question in a meaningful way.

    It should be no surprise. The general expectation is that the next government will be comprised of FG and Labour. Why should these parties, excluded from power for 14 years, introduce reforms of parliament and its committees to restrain their exercise of the extreme executive dominance they have spent the last 14 years itching to grasp?

  63. @Paul Hunt,

    want to volunteer as a silo-breaker? 🙂

    The political system in Ireland is interesting, to me the most important question is the one I proposed above. I’ve read some of the suggested debatable questions and to me most of them have a hint of micromanagement.

    As you say, the new parties in power probably don’t want to give up the executive dominance. The thing is, the electorate do have some power and at the very least the electorate can ask difficult questions before the election. The more questions asked, the easier they all are to dodge. Select a few & make sure all of the few are being answered.

  64. McWilliams cant totally wash his hands of the gaurantee. He cant have known how insolvent the banks were but he is not blameless http://www.davidmcwilliams.ie/2008/09/28/state-guarantees-can-a…vert-depression

    The article states “The beauty of guaranteeing deposits is that you use no money – not a penny. Instead, the government is using its sovereign credit as the country with Europe’s lowest debt/GDP level to restore confidence in the system. The civil service view appears to be that such a guarantee would subject Ireland to the risk that people withdraw money, disbelieving the state”

  65. Trying to apportion blame to David McWilliams for the bank guarantee smacks of desperation on the part of FF/Greens.

    No doubt Finance Minister Lenihan was in receipt of different advice from many different quarters before he implemented the bank guarantee.

    Advice can be sought but there is no obligation to act of advice.

    I’m afraid the bank guarantee is the responsibility of Mssrs Lenihan and Cowen solely.

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