Government warned bank guarantee ‘high risk’

THE Government was told by its lead consultants not to let any Irish institution fail, but that a blanket guarantee was a high-risk approach.

Merrill Lynch was drafted in as advisers three days before Government swept in to save the banks in September 2008.

At a meeting with Minister Brian Lenihan and his senior civil servants, the Merrill Lynch team said the guarantee would help prop up bad banks and could be a mistake for the nation’s credit rating.

The team said the banks’ assessment of themselves was not to be valued because management tended to try “play out to the end”.

For its subsequent headline analysis, Merrill Lynch gathered what information in could in the space of 48 hours. It told the NTMA the Government had to act within two weeks, and most likely within nine days.

It weighed up the pros and cons and said the wholesale bank guarantee was the “best/most decisive and most impactful” choice from the point of view of the markets.

However, it said it was questionable whether the markets would find it credible and it would need to be in the region of €500 billion.

The nationalisation of Irish Nationwide and Anglo Irish would still have to be considered. The subsequent run on Anglo and the nationalisation of both institutions proved this analysis to be correct.

Merrill Lynch also proposed the immediate nationalisation of Anglo and Irish Nationwide to deal with the worst problems. This would have meant funding all their losses and would also impact on the two bigger banks, AIB and Bank of Ireland.

The Good Bank/Bad Bank model, which was later championed by Fine Gael, was also discussed but was considered to be very complex and could take too much time.

It said it could be the second phase in a wider solution, but not the first.

The report said Anglo had just days before it exhausted all possible sources of funding and its collateral with the European Central Bank was close to being maxed-out.

With regard to Irish Nationwide, the report said there were concerns about the level of influence held by its then chief executive Michael Fingleton.

The final report suggested a number of options. One said the Government should act as an emergency lender for the banks to help them ride the liquidity problems.

Another said the Government should prepare to intervene in both Anglo and Irish Nationwide within days with a focused protective guarantee.

It told the Government that Anglo’s main investors were in Ireland, Britain and America, but there was a significant shareholding for Sean Quinn.

It said given the level of cross-over between the subordinated debt holders and the more secure senior debt, both should be guaranteed.

The two junk institutions could be combined to form a bad bank, which would act as a rubbish dump for the rest of the financial sector.

Another option was to provide lending directly to the banks under specific terms for a period of nine months. This would underpin the commercial loans taken out directly with the banks involved.

It had positives, but ultimately it would not solve the long-term problems and could leave the Government having to lend €100 billion to the banks at high interest rates.


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