Banking bailout 10 years on: The crash that killed the Celtic Tiger

The warning signs were there, and yet when it came to the crunch, the bank guarantee caught many by surprise, writes Political Editor Daniel McConnell.

The Celtic Tiger. From decades and centuries of poverty and peasantry, we had begun to soar the highest heights.

We thought of ourselves as world beaters.

Rather than leaving these shores, people were coming here to find their fortunes.

Decked patios, two cars, five foreign trips a year, helicopters to the Galway Races. There was no stopping us.

But like Icarus before us, we flew too close to the sun and got burnt. And burnt badly.

After the boom of booms, the first clear signs of the wheels coming off the Irish economy came on St Patrick’s Day 2008.

In what became known as the St Patrick’s Day massacre, shares in banks, and Anglo Irish Bank, in particular, slumped significantly.

The stock market closed at its lowest level in three years with 3.5bn wiped off the value of stocks.

“It is now pretty clear that by May 2008, most of the Irish banks were pretty well bust,” said economist Colm McCarthy.

In the wake of that catastrophe, senior government officials and advisers were lobbied by banking figures to introduce some form of state support or guarantee to stave off further attacks on the Irish banks.

Bankers argued an injection of government cash would restore confidence in institutions on international share markets.

Notable figures in the financial world at the time included David Drumm, the chief executive of Anglo Irish Bank, and the financier Dermot Desmond, who lobbied for a guarantee.

In July, Davy Stockbrokers did the same.

That same month Drumm also informed the Financial Regulator that he would negotiate with 10 large Anglo customers to purchase businessman Seán Quinn’s shareholdings in the bank in an effort to reduce its exposure.

David Drumm

On July 28, 2008, Cowen played golf and had dinner with Anglo’s chairman, Seán FitzPatrick.

The dinner later fuelled rumours that senior government figures were personally close to bankers.

Meanwhile, Cowen had, by mid-summer, instituted a secret team of officials at the Department of Finance, including Kevin Cardiff, which was working on a contingency plan in case the banking system collapsed.

Cardiff said: “We were afraid that at any point the knowledge there was a team working on a banking rescue might trigger a run.”

Cardiff’s preparation for a potential banking collapse included a carefully constructed simulation exercise in which the Department of Finance, the Central Bank of Ireland, and the Financial Regulator pretended one Irish bank was in trouble.

“Those parties playing the Central Bank/Financial Regulator [recommended] that the government should provide a guarantee,” recalled Cardiff.

In early September, financier Dermot Desmond rang Central Bank governor John Hurley about a guarantee and said: “Look, I’m in this market, I see things happening. I think you might need to consider this guarantee thing.”

Fears of a bank run, which had happened with Northern Rock in Britain the year before, stalked the Government.

As the new finance minister, Brian Lenihan, as well as being suspicious of his officials at the Department of Finance, was developing a cynicism towards the information coming out of the banks.

The banks were telling the Government in official communications that there wasn’t an issue or a difficulty.

The attitude of Lenihan was that the banking sector as a whole had gotten itself into trouble.

“There was a tendency among bankers to blame Anglo Irish Bank for everything. Nobody believed that the problem was confined to Anglo,” said Conor Lenihan, speaking on his brother’s behalf.

It was repeatedly stressed by the banks that they merely had a liquidity (cashflow) problem as opposed to being near insolvent.

Brian Lenihan

There was enhanced concern about international and national finances as it became clear that the EU was slipping towards recession.

On September 3, Lenihan, already grappling with an escalating banking crisis, brought an extensive memo to cabinet which outlined a forbidding new fiscal and economic position.

While publicly, Lenihan and Cowen suggested and repeated the mantra that the fundamentals of the economy were sound, according to the document, stamped ‘Secret’, “conditions in the economy have deteriorated sharply over the summer and the position of the public finances has worsened considerably”.

But as the country and its banks neared the edge, Fianna Fáil did what it then did best — it convened for pints and a sing-song.

The annual Fianna Fáil parliamentary party headed for its think-in to the Clayton Hotel in Galway, accompanied by journalists and a few handlers.

Dara Calleary, then a new TD and now the party’s deputy leader, was taken aback at the relaxed demeanour of the two Brians, given wider events.

“If you want to bring it back to just September, the day Lehman’s went, we were having our think-in in Galway.

"And one thing that jarred me was waking up on a Monday morning, and Lehman’s was going, and on a Tuesday morning the various ministers left the parliamentary party meeting to go back and do a deal on social partnership. What the fuck!?”

The TV images of New York bankers leaving offices with boxes of belongings were a wake-up call to everyone who watched them.

Yet Cowen and Lenihan thought it essential to work hard on keeping an air of normality.

As they showed over the coming two-and-a-half years, neither man was given to publicly displaying evidence of the effects of pressure.

The perilous state of the country’s finances was about to emerge into the open via that national discussion forum: RTÉ radio’s Liveline.

Brian Cowen

On Thursday, September 18, the country almost experienced a bank run triggered by Joe Duffy’s talk show.

Liveline began its programme that Thursday with an employee of An Post extolling its security for savers.

However, it quickly began to give panicked callers free rein to express their lack of confidence in the banking system.

Seemingly appalled that ordinary people might actually be aware of the factual predicament of their banks, Brian Lenihan contacted the national broadcaster.

He rang the director general of RTÉ that day to express his outrage at Liveline causing fears which might lead to a run on the banks.

Lenihan made public his concern about the programme on Friday morning when RTÉ’s then economics editor, George Lee, interviewed him.

He insisted that deposits were not in any danger and said that people should not be going to banks to shift their deposit accounts “on the basis of unfounded allegations made on radio programmes”.

Lenihan’s strategy — dealing with the emerging banking crisis behind the scenes while publicly maintaining confidence — had been blown apart.

That Saturday, September 20, it was announced that the government would guarantee all deposits in Ireland up to €100,000, increasing significantly the existing €20,000 state guarantee on private bank deposits.

This told the world that Irish banks were in real trouble.

However, the €100,000 deposit guarantee gave the government just 10 days breathing room.

Cowen, Lenihan, Cardiff, and others in authority were discussing a guarantee, in some shape or form, as  September progressed.

Despite the mounting crisis, for the week of September 22-26, Brian Lenihan’s diary was filled with budget meetings with ministers and officials.

Secret meetings also continued between officials and the banks.

“Obviously the situation was worsening, you had all of the banks… getting very agitated, there was a series of meetings, informal, formal, between the Department of Finance and their senior executives,” said Lenihan.

Lenihan’s diary says that on Saturday, September 27, his afternoon appointment was ‘1pm Gowran Park Race Day, Gowran Park'.

Jean-Claude Trichet

Lenihan later claimed that at this time, he received a warning from ECB President Jean-Claude Trichet telling him to ‘save’ Irish banks. Lenihan said: “Mr Trichet rang me, and hadn’t been able to get through to me. I was at a racecourse in County Kilkenny at a Fianna Fáil event on the Saturday.

"So I caught up with Mr Trichet’s message the following day, which was that ‘you must save your banks at all costs’.”

In a 2013 interview with me, Trichet denied repeatedly that Ireland was singled out by the ECB to be punished: “We had the same message to all countries.”

Junior minister John McGuinness was with Lenihan for most of the day at Gowran Park.

“I remember being at a fundraising meeting in Gowran. Brian Lenihan was beside me and he was called away to take a phone call … and when he came back, after some time, I remember him being ashen-faced.

“And he looked at me with those big, wide eyes and he said, ‘John we’re in real trouble.’

“It was from Trichet; he did phone him that day. It was on his mobile phone that he called him — I was standing beside him.”

So, Ireland was being told to save its banks, but to do so without any help from the ECB.

The following day, Sunday September 28, officials from the department had a lengthy meeting with the NTMA at which they were “working out the options”.

Lenihan and his top officials had detailed meetings with the Central Bank governor and Financial Regulator.

Cowen told us: “We had discussed it on the Sunday. We didn’t expect the thing to hit on the Monday.”

Minister Willie O’Dea did not believe he was given sufficient information at the Sunday cabinet meeting or any other before the blanket guarantee that was imposed in the early hours of the following Tuesday.

“Well we had a rough agreement about the figures, [but] there was no agreement to my knowledge about a course of action, particularly about the guarantee … I mean if we’d agreed, in principle even, to something as big as that, sure that would have stuck in my mind …”

What is clear is that when it came to act less than 24 hours later, Ireland would have to act alone.