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The €400 billion night
27 September 2009 By Pat Leahy, Political Editor
A year ago on Tuesday, the course of modern Irish history took a dramatic and decisive turn.
The night of September 29, 2008, saw the state decide to guarantee the loans and deposits of the Irish banks, amid fears that the entire sector was about to collapse.
The state’s involvement in the Irish banking system - massive transfers of capital, nationalisation and now the National Asset Management Agency (Nama) scheme to rescue the sector from the consequences of its own disastrous lending policies - all stem from the fateful decisions made that night.
After September 29, 2008, Ireland entered a new and financially fraught era. Although events came to a head on that tension-filled Monday night, the storm clouds had been gathering over Irish banks for weeks, if not months, beforehand. The government had been on high alert for weeks, and papers detailing various scenarios and options had been prepared in the Department of Finance.
The relatively new and inexperienced minister, Brian Lenihan, was about to be pitched into a crisis for which nothing in his past political or professional life could have prepared him.
Implicitly, all governments stand behind their domestic banking systems, if not individual institutions. No government can allow a freeze-up of the system that leaves people unable to access cash - social disorder would soon break out. But for the Irish government, that implicit guarantee would soon be made explicit, and it would come with a frightening potential price tag.
The gathering storm
As summer turned to autumn, international markets - particularly in the United States - were in turmoil, and the Irish banks were on the slide. For months, rumours about individual banks being on the verge of crisis had circulated regularly through political and financial circles.
In some cases, the rumours were enough to prompt the withdrawal of large deposits.
Most (but not all) of the rumours centred on Anglo Irish Bank, the buccaneering property lender of first resort which funded much of the spectacular Irish property bubble of recent years.
But if Anglo was the poster boy for the boom, it had also had a corrosive effect on the lending policies of the other banks, which felt they could not sit by and watch Anglo culling huge profits - and huge bonuses for its executives.
The feeling in the other banks, according to one senior banker, was ‘‘we can’t let these guys eat our lunch’’. Pressure trickled down from bank boardrooms to senior management and down the line to do whatever was necessary to compete with Anglo, the fast-growing darling of the financial markets.
Since earlier in the year, the National Treasury Management Agency had been wary of depositing cash with Anglo, a practice which resulted in the bank pressurising the NTMA’s chief executive, Michael Somers, to change the policy. As he told an Oireachtas committee earlier this year, he would not relent. He was concerned about Anglo’s exposure to property lending.
But if Somers had been concerned about Anglo from a long time back, the government’s public statements reflected a sunny complacency. In an episode similar to the currency crisis 16 years earlier, ministers were forced to protest that everything was just fine, because doing otherwise would surely bring disaster.
‘‘I want it to be known that the government is confident about the strength and resilience of the Irish financial system," Lenihan said just two weeks before the guarantee.
‘‘The Central Bank and Financial Regulator have stressed the soundness and stability of the Irish financial system."
But the crisis meetings were already under way between Lenihan and senior officials in his department, the Central Bank, the Financial R egulator, the NTMA and advisers Merrill Lynch. They knew emergency action might be necessary.
It was the Central Bank and the Financial Regulator which had raised the flag about Anglo facing potential difficulties.
Strangely, the only discussion between Lenihan and Anglo chairman Sean FitzPatrick took place on September 18, when FitzPatrick met Lenihan and his department secretary general David Doyle to put forward the rather bizarre plan that the state would support a merger between Anglo and Irish Nationwide. Lenihan said he thought little could be achieved by such a move.
Sources also say that, around this time, the two major banks were approached to see whether they would have an interest in taking over, Anglo.
‘Thanks, but no thanks’, was the predictable response. By this stage, however, Anglo was under mounting pressure as deposits were disappearing by the day. Ten days earlier, Irish Nationwide had been forced to deny a report on the Reuters news agency that it was in discussions with funders to try to guarantee its future.
Reuters admitted that the story was mistaken, but it all added to the fear- at home and abroad - that the Irish banking sector was in trouble. Radio shows openly discussed whether money was safe in Irish banks.
On September 19, Lenihan announced that he would increase the guarantee on bank deposits from €20,000 to €100,000. But still the money left as big corporate depositors and major banks all followed the international trend to keep their money at home.
For a banking system which had become more and more reliant on international deposits to fund borrowing at home - most of it property-based - it was a potentially catastrophic trend.
In fact, the Irish banking system was heading for the edge of a cliff. As global credit markets began to freeze up, financiali nstitutions were beginning to toppl e. On September 15, Lehman Brothers, a huge US investment bank and one of the pillars of Wall Street, closed and announced liabilities of $600 billion.
Shockwaves echoed around the world. If Lehman could go, who would be next? Banks began to hoard their cash. Days later, the US government announced an $85 billion bailout for the insurance giant AIG. British giant HBOS teetered on the edge of the abyss and then was pushed into a shotgun marriage with Lloyds TSB. The tsunami was heading for Dublin.
The collapse of Lehman Brothers changed the face of the global economic crisis. If banks all over the world were potentially vulnerable, could Ireland’s hugely exposed banks - dependent on the international money markets to finance and refinance their massive property lending - survive unharmed? They couldn’t. On the evening of Monday, September 29, a fortnight after Lehman’s death dive, the Irish banking system reached the brink.
The drama unfolds
In the days previously, rumours had swirled around financial circles with renewed intensity. Some Anglo employees were said to be withdrawing their own deposits from the bank.
Traders began to take positions in anticipation. The market sharks had smelled blood in the water. When the markets opened for business on Monday morning, shares in Irish banks were mercilessly dumped. All day Monday, Anglo Irish Bank shares were sold at lower and lower prices; by the time the Stock Exchange closed for business, the bank had lost half its value.
Cowen and Lenihan and their senior officials were not taken completely by surprise. They had been fearing such a development for days now. Cowen had attended a meeting on September 24 with officials from the Central Bank, the Department of Finance and the NTMA, where there was some talk of having to take emergency action, possibly by nationalising Anglo.
On Sunday, September 28, on the margins of a special cabinet meeting to prepare for the budget - brought forward to mid-October as an emergency measure - they had discussed the options for some sort of bank rescue with the leader of their coalition partners, John Gormley. The Green minister had been influenced by discussions he had with the economist and newspaper columnist David McWilliams.
In that day’s Sunday Business Post, McWilliams had argued forcefully for a bank guarantee, but only on deposits. Finance minister Lenihan had also spoken to McWilliams about the banks on a number of occasions in the previous weeks. He had also consulted the European Commissioner and former finance minister Charlie McCreevy.
That Sunday evening, Lenihan and his senior officials met Central Bank governor John Hurley in his office on the top floor of the Central Bank’s Dame Street headquarters.
During the boom years, the dozens of cranes that dotted the Dublin skyline were clearly evident - by now, however, many had disappeared.
That day, news broke that the crisis had well and truly spread to our euro zone partners, with the Belgian government forced to part-nationalise Fortis, and emergency funding arranged for Germany’s second-biggest commercial property lender, Hypo Real Estate. There was a mood of grim schadenfreude as Lenihan and Hurley at least had the reassurance that we were not alone in the euro zone in facing problems. Up to then, contact had been limited at a political level across Europe, and Lenihan and his officials had been approaching it as a domestic financial crisis which had to be sorted out.
By that stage it was clear that Monday would be crucial. The falling share price wasn’t the principal problem - the banks had already lost some 80 per cent of the 2007 highs - but it was what the falls represented that was of concern to the ministers. The markets were anticipating that an Irish bank was going down, and that belief would sooner or later precipitate a run on one of them - possibly all of them.
No bank, however healthy, can survive a run on deposits. On the Monday, deposits left Anglo in droves and deposits in the others banks also started to trickle steadily outwards. The government felt it could not risk a bank collapse.
Crucial meetings
Soon after the Dublin market closed, Cowen and Lenihan, and their secretaries general Dermot McCarthy and David Doyle, met in the Department of the Taoiseach.
The meeting had been planned the previous week to bring the Taoiseach up to date with events since the previous meeting, but Monday’s events had turned it into a crisis gathering.
Central Bank governor John Hurley and financial regulator Pat Neary joined them, and later the attorney general, Paul Gallagher, sat in. Senior Finance officials, including Kevin Cardiff and William Beausang, came and went during a rolling series of meetings that lasted all evening and into the early hours of the morning.
Cowen’s advisers, Peter Clinch, Joe Lennon and government press secretary Eoghan O Neachtain, were also engaged in the process. Two notes were passed into the meeting early on.
One bore the news that the Bush White House’s $700 billion rescue plan for American banks had been rejected by Congress. The other said that the chief executives of Bank of Ireland and Allied Irish Banks were seeking a meeting with the Taoiseach. A call had come earlier from Bank of Ireland saying that the chairmen and chief executives of the two banks wanted to meet the Taoiseach and the Minister for Finance.
In the circumstances, it was decided that they had to be given a hearing. The men in the room now held the future of the Irish banks - and consequently of the economy - in their hands.
They could see only three options. One, do nothing; two, nationalise one or more of the banks; and three, some form of guarantee. They discussed nationalising Anglo immediately, but concluded that to do so would put the others under probably fatal strain.
They dismissed doing nothing and allowing the markets to decide - at least some of the banks would soon fail. So they concluded that some form of state underwriting of the system would have to take place. According to people who were involved in the process, this decision was reached early in the evening. But important questions remained: how broad would the guarantee be?
Senior banking executives were spirited in and out of the Department of Finance and the adjacent Government Buildings all evening. One civil servant, seeing a senior bank executive entering the building, enquired what was going on. ‘‘For God’s sake, don’t say anything," shewas told. ‘‘You’ll have a run on the banks!"
The chairmen and chief executives of the two biggest banks slipped into Government Buildings at 9.30 that evening.
Dermot Gleeson and Eugene Sheehy of AIB and Richard Burrows and Brian Goggin of Bank of Ireland were led in to the Sycamore Room and asked to wait - and wait. They had been in touch with each other during the afternoon as the situation worsened, according to senior banking sources, and they were facing some funding difficulties themselves. It was clear that Anglo was in imminent danger of collapse but that, if outflows continued, AIB and Bank of Ireland would soon be in trouble too.
After two hours, they were led in to see Cowen and Lenihan. The suggestion from at least some of the bankers was that Anglo should be nationalised.
Cowen’s response was, ‘‘We’re not fucking nationalising Anglo." Lenihan was calling it ‘‘the N word’’. The two bankers outlined the starkness of their situation, and warned that the collapse of Anglo could precipitate a domino effect among the other banks.
Crucially, the Taoiseach and the finance minister came to believe that Anglo did indeed have ‘‘systemic’’ importance to the Irish economy.
The bankers’ case was heard and they were sent out to wait - and liaise with officials - as the politicians and officials made the final decisions. The guarantee route was chosen, and the key decision was taken to guarantee all deposits and the bulk of the banks’ other liabilities, including much of their subordinated debt.
The state would guarantee the deposits, loans and obligations of the six Irish banks - a total sum of some €400 billion, more than twice the country’s GNP. Even if the men felt they had no option, it was still a breathtakingly bold move.
This wide guarantee was agreed, sources say, to ensure that the main banks - who had a significant reliance on subordinated debt - were protected.
For their part, AIB and Bank of Ireland would provide €4 billion each to prop up Anglo the next morning if that was required. (In the event it wasn’t.) There were extensive negotiations on this: the banks wanted to be assured that, if Anglo was nationalised, they would get their cash back. The bankers left Government Buildings still expecting that Anglo would have to be nationalised in the coming days, but in the event, the positive market reaction to the guarantee meant it didn’t happen.
The message spreads
Meanwhile, several ministers were put on notice that an incorporeal cabinet meeting would take place to approve the measure, and officials prepared briefings for them.
Some ministers were easier to contact than others. When the formal telephone calls took place, officials couldn’t contact the Green Party leader and environment minister, John Gormley.
His mobile phone was either switched off or powered down. Eventually, officials rang the gardai at Irishtown. Gormley was woken by a garda at his door, asking him to ring the Taoiseach’s office.
Micheal Martin was in Newark airport, returning from the United Nations General Assembly. He went to a private room to take the call.
Later on the Tuesday morning, Lenihan, Cowen and some senior officials engaged in a round of telephone contacts with key European policy-makers to inform them what they planned.
Lenihan called Christine Lagarde, the French finance minister and head of the EU’s council of finance ministers, and Jean-Claude Juncker in Luxembourg, chair of the euro zone group of finance ministers, and briefed them, speaking in fluent French. A copy of the decision was sent to the European Central Bank at 4.30am, and John Hurley rang the ECB chief, Jean-Claude Trichet, afterwards.
He had kept in touch with ECB officials all evening. On the face of it, the move looked like favouring some banks to the exclusion of others, contrary to European regulations. But they knew that the politics of the situation meant that some rules were more important than others.
The British government was furious, and there were a number of testy telephone conversations between Dublin and London, involving Lenihan and chancellor of the exchequer Alastair Darling, and Cowen and prime minister Gordon Brown.
Some foreign banks here complained of significant outflows of deposits in the wake of the guarantee. Eventually, British-owned banks operating in Ireland were offered admittance to the scheme, though they judged the price to be too high.
The government press secretary, Eoghan O Neachtain, had been swapping drafts of statements with the Department of Finance press office since the previous evening. Now, they formulated a rushed media timetable, tipping off the morning shows and arranging briefings. The formal statement was issued at 6.45am, and Lenihan followed it with an interview with RTE for the morning radio bulletins.
The minister had gone home in the early hours to grab a few hours sleep. Opposition leaders were also informed by telephone.
By the time reporters began to gather in the Department of Finance on Tuesday morning following a rushed summons, the magnitude of the move was becoming clearer.
‘‘We’re in the eye of the storm here," Lenihan told the hastily arranged press conference. He looked like a man who had drunk a lot of coffee. ‘‘It’s time for action, swift and decisive."
Banking crisis timeline
By Valerie Flynn
September 29, 2008: The Irish government guarantees the liabilities and deposits of the six main Irish-owned financial institutions: AIB, Bank of Ireland, Anglo Irish Bank, Irish Life & Permanent, EBS and Irish Nationwide.
October 9: Eligibility for the bank guarantee scheme is extended to non-Irish banks with a major presence in Ireland: Ulster Bank, First Active, Halifax Bank of Scotland, IIB Bank and Postbank. The Department of Finance says this will bring the total liability from €440 billion to €500 billion. All except Postbank decline to join.
December 14: The government announces a recapitalisation programme for AIB, Bank of Ireland, and Anglo worth up to €10 billion.
December 18: Sean FitzPatrick resigns as chairman of Anglo.
December 19: David Drumm resigns as Anglo chief executive.
January 9: 2009 Financial Regulator Patrick Neary announces his retirement.
January 15: The government announces that Anglo Irish Bank is to be nationalised. Minister for Finance Brian Lenihan says recapitalisation alone won’t guarantee Anglo’s future viability.
February 11: The government announces the recapitalisation terms to be offered to AIB and Bank of Ireland. €3.5 billion will be invested in each bank at an 8 per cent annual return, payable in cash or ordinary shares.
February 12: Bank of Ireland revises its estimated three-year losses on bad loans from €3.8 billion to €4.5 billion – and maybe even €6 billion in a worst-case scenario.
February 13: IL&P chief executive Denis Casey, finance director Peter Fitzpatrick and treasury head David Gantly resign. It had emerged that IL&P had deposited over €7 billion in Anglo in
September 2008, including €4 billion on the last day of Anglo’s financial year, which was withdrawn the following day.
February 17: Irish Nationwide chairman Michael Walsh resigns. He is later replaced by Danny Kitchen.
February 25: Bank of Ireland chief executive Brian Goggin announces he will retire a year earlier than expected. He’s replaced by the head of the bank’s Irish operations, Richie Boucher.
March 2: AIB announces that its bad loans could reach €8.5 billion over three years.
March 10: EBS chairman Mark Moran and finance director Alan Merriman announce their departure.
April 2: Irish Nationwide chief Michael Fingleton resigns.
April 7: The government approves a harsh emergency budget and announces details of a management company to take impaired assets off the banks’ books – Nama.
April 30: AIB announces that chief executive Eugene Sheehy, chairman Dermot Gleeson and finance director John O’Donoghue will step down. Gleeson is replaced by Dan O’Connor.
May 13: AIB shareholders vote overwhelmingly in favour of state recapitalisation. One throws eggs at company chairman Dermot Gleeson at the EGM. The bank warns that its bad loan losses for this year will be €4.3 billion, exceeding previous worst-case scenario estimates.
May 29: The government announces that it will pump €4 billion into Anglo. The bank reported a loss of €4.1 billion, which could reach €7.5 billion.
July 3: Richard Burrows steps down as Bank of Ireland chairman. He is replaced by former bank chief executive Pat Molloy.
July 30: Nama legislation is published.
September 3: Trinity College Professor Patrick Honohan is named as the new Central Bank governor, replacing John Hurley.
September 16: The Minister for Finance unveils the Nama bill: the state will pay around €54 billion for loans that the state currently values at €77 billion.
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