Banking bailout: A very costly bailout results in a decade of ramifications

The effects of rash decisions taken in the last two days of September 2008 would have ramifications for the next decade, writes Political Editor Daniel McConnell.

Banking bailout: A very costly bailout results in a decade of ramifications

The effects of rash decisions taken in the last two days of September 2008 would have ramifications for the next decade, writes Political Editor Daniel McConnell.

After the collapse of Lehman’s on September 15, 2008, a flight of deposits occurred in the six main Irish banks.

By Monday, September 29, they were in deep trouble. And one, Anglo Irish Bank, was on the verge of collapse.

At 3pm that day, Anglo chief executive officer David Drumm and chairman Seán FitzPatrick arrived unannounced at the offices of economist Alan Gray.

Their maverick bank was finally running out of cash and it threatened to bring down the rest of the financial system. They needed help.

A friend of Brian Cowen, Gray was approached by Drumm and FitzPatrick in the faint hope that he could help.

Gray had rebuffed a similar appeal from FitzPatrick earlier in September but Drumm and FitzPatrick were armed with the information that their bank would be unable to open the following day unless major intervention took place.

Gray had advised a number of Irish governments, had been appointed to the board of the Central Bank by Cowen, and had met Cowen and FitzPatrick at the ‘Anglo dinner’ at Druids Glen in July.

FitzPatrick had called to Gray’s office shortly after the dinner.

He told the economist that the Irish banking sector, in particular Anglo Irish Bank, was experiencing liquidity difficulties.

“I indicated that this was well known in the market,” recalled Gray, “and recommended that the appropriate channel to discuss this was for Anglo Irish Bank to contact officials in the Central Bank.

"Mr FitzPatrick revealed that they were already informed and the meeting concluded after a number of minutes.”

However, like a spurned lover who just won’t take no for an answer, FitzPatrick returned.

Seán FitzPatrick
Seán FitzPatrick

It is not clear what they wanted Gray to do, but it can be assumed that they hoped he could use his influence with the government.

Within 10 minutes, without any succour, they were gone elsewhere on their mission to save their bank.

FitzPatrick then contacted Richard Burrows, the chairman of Bank of Ireland, that day with an urgent request for a meeting.

With their bank only hours away from running out of cash, and knowing they needed a drastic intervention, they sought to plead their case.

Burrows, FitzPatrick, Drumm, and Bank of Ireland chief executive Brian Goggin met in the boardroom of the bank’s head office on Baggot St at lunchtime.

Burrows and Goggin were not in a giving mood and the meeting was short and to the point.

Burrows said: “Mr FitzPatrick claimed that Anglo Irish Bank had a significant credit facility which was to fall due the following day and that it was not in a position to repay this facility or to roll it over.

“I cannot, at this stage, recall the size of this facility but I remember that it was significant. Mr FitzPatrick asked if Bank of Ireland would be interested in buying Anglo Irish Bank or any part of it.”

Burrows declined and the Anglo pair resumed their fruitless odyssey, with FitzPatrick stating at the end of this brief meeting that he was going to contact Allied Irish Bank (AIB).

Dermot Gleeson, then chairman of AIB and a former attorney general, took a call from FitzPatrick but refused to meet him.

Over at Merrion St, in the Department of Finance, Brian Lenihan was, by early afternoon, acutely aware that Irish banks were haemorrhaging money.

Brian Lenihan
Brian Lenihan

The taoiseach, along with his finance minister and key officials, gathered at 6.15pm in Government Buildings to decipher the scale of the crisis now facing them.

In the main meeting room that evening were: Cowen, Lenihan, attorney general Paul Gallagher, secretary general of the Department of Finance David Doyle, assistant secretary of the Department of Finance Kevin Cardiff, Central Bank governor John Hurley, deputy governor Tony Grimes, Financial Regulator chairman Jim Farrell, Financial Regulator chief executive Patrick Neary, and Eugene McCague from Arthur Cox & Co solicitors.

Dermot McCarthy, secretary general of the Department of the Taoiseach, joined the meeting after it began, as did another Department of Finance official, William Beausang.

Government press secretary Eoghan Ó Neachtain and the taoiseach’s chef de cabinet, Joe Lennon, came in and out throughout the evening. Cowen chaired the meeting — he did not take notes.

Hurley outlined what had been happening during the course of the day, adding that bank shares were down in the market and Anglo Irish Bank had run out of cash.

Kevin Cardiff felt from early on that night that Cowen favoured a broad guarantee, which was estimated.

Pat Neary spoke of the need for the introduction of a guarantee to be considered in view of the serious situation which had developed across the financial system.

Hurley had been in touch with the president of the ECB, Jean-Claude Trichet, over the weekend and confirmed to the meeting that there was no euro-wide initiative in the offing.

Just as other countries had to take decisions about their own banks, the Irish government had to act alone.

“It was clear that we were on our own, we would have to deal with this at a national level,” recalled Cowen.

So while the government had to act alone, the difficulty was that the ECB was insistent that no European bank was to be allowed fail because of the contagion effects.

In other words, there could be no ‘Lehman Brothers-type event’ in the eurozone.

Events moved rapidly on Monday evening, and it is now clear that many members of the cabinet weren’t consulted sufficiently.

As the evening progressed, and as the scale of the crisis was becoming clear, a difference of opinion emerged between the taoiseach and the finance minister as to what to do.

“Lenihan indicated that he felt part of the solution would be the nationalisation of Anglo,” said Cowen. “I did not think that nationalisation should be the first course of action and I said so.”

The former governor of the Central Bank, Patrick Honohan said Cowen took a unilateral stance.

Lenihan argued strongly for the immediate nationalisation of both Anglo and Irish Nationwide Building Society — but “he was overruled on the night”.

Cowen, however, didn’t see nationalisation as a confidence-building measure.

He believed the guarantee choice looked like a safer option if it was time limited.

Neary confirmed to the meeting in Government Buildings that all the institutions had sufficient capital and were solvent.

Cowen was adamant of one thing: “Anglo to fail was simply not an option on the night. It would have had implications for the whole system.”

One official who was in Government Buildings and involved that night characterises Lenihan as being indecisive.

“Lenihan was no leader of men that night,” said the official. “People often speak of Lenihan’s strengths as a barrister but his weaknesses came to the fore that night.

Realising a decision was needed and coming from the deliberative and nuanced world of the Law Library, ultimately he couldn’t make his mind up. It was infuriating.

Just after 9.30pm, Cowen and Lenihan were informed that the chairmen and CEOs of AIB and Bank of Ireland were looking to meet with them.

To Cowen, they were not the people he most wanted to see at this time: “I didn’t go get them. They asked to come in.”

Richard Burrows, chairman of Bank of Ireland, and his CEO, Brian Goggin, along with AIB’s chairman, Dermot Gleeson, and his CEO, Eugene Sheehy, were shown into Government Buildings but told to wait.

Cowen adjourned the meeting of officials before the bankers could be admitted.

“I decided to get an external view. Mr Alan Gray, an economist and a Central Bank board member, was someone whose views I respected. I phoned him and asked him what he thought of a guarantee option being used.”

Cowen and Lenihan then went to the taoiseach’s private office and had what Cowen describes as a calm, non-confrontational conversation.

According to Cowen, Lenihan was still backing the nationalisation of Anglo, while Cowen wanted the time-limited guarantee. The discussion continued in the main room with the others.

Kevin Cardiff did not recall Cowen, as has been reported, shouting: “We are not fucking nationalising Anglo” and thumping the table.

“It would be a lie to say that I never heard the taoiseach use the F-word, but I don’t remember that specific turn of phrase,” said Cardiff. “I don’t think that happened, I don’t think it happened in that way.”

Having been made to wait for a long time, the bankers were eventually given a hearing.

When they were brought in to meet the taoiseach, the Bank of Ireland and AIB chiefs wanted a guarantee for themselves and wanted Anglo and Irish Nationwide dealt with differently.

Cowen and Lenihan listened to them but gave no indication as to their intentions.

With the bankers dismissed, Cowen, Lenihan, and their officials continued to debate the nationalisation and guarantee options.

Cowen then declared that they would go with a guarantee and everyone concurred.

The bank representatives from AIB and Bank of Ireland, who were camped in separate rooms in Government Buildings, were brought back into the meeting and the issue of liquidity support for Anglo was raised with them.

Burrows agreed to provide €5bn if the government would guarantee that Bank of Ireland would get its money back.

Gleeson recalls that he agreed to provide €5bn but he claims he was of the belief “that an orderly dealing with Anglo would occur the following weekend”.

In layman’s terms, Gleeson understood Anglo was to be wound up and liquidated.

When the bankers finally departed for home, Cowen, Lenihan, and the officials began working out the exact details of the plan. Legislation now had to be drafted to put the decision into law.

This was to be a government decision, one that would have to be defended by all members of the cabinet.

The ratification of the Cowen and Lenihan judgment had now to be put to ministers, many of whom were tucked up in their beds.

So the decision was made by means of an ‘incorporeal’ cabinet meeting, whereby ministers were individually contacted by phone, had the guarantee run by them, and were asked for their assent.

Ministers had been contacted one by one between seven and nine that evening by an official of the government secretariat to tell them to expect a call, at any hour, to discuss a banking decision.

Éamon Ó Cuív felt it was a mistake not to call the cabinet to Dublin for a face-to-face discussion in Government Buildings.

Eoghan Ó Neachtain had tried ringing John Downing, his Green Party counterpart, because he couldn’t get John Gormley.

The Green Party leader and minister for the environment, heritage, and local government had to be awoken by gardaí from Ringsend station knocking on his door after he failed to answer his phone. He liked to head for bed early and his phone was turned off.

Willie O’Dea is adamant that the cabinet should have come in.

“I was 140 miles away in Limerick,” he said. “I got a call, there was no debate. I would have welcomed discussion at cabinet, but I was told this had to be done before the markets opened.”

Mary Hanafin concurred, saying: “That decision should not have been taken at a quarter to two in the morning.”

Cowen left Government Buildings around 3.30am.

Shortly before 5am, David Murphy of RTÉ was contacted by Eoin Dorgan, a spokesman for Lenihan, who had tried, unsuccessfully, to reach George Lee the night before.

Murphy was briefed for a news report on RTÉ Radio 1’s Morning Ireland programme at 7am, just as the markets opened.

Lenihan returned to work from his home in Strawberry Beds, Castleknock, at 6am and began calling some of his European colleagues to inform them of the government’s decision.

All this occurred before a scheduled 10.30am full cabinet meeting.

Pat Carey, as chief whip, also sat as a minister at cabinet, albeit without voting rights. He was, to his surprise, not consulted the night before.

Despite this, he was to play a central role that morning in the organisation of Dáil logistics.

Carey and his office had been on standby to bring in emergency legislation since the start of September.

Lenihan addressed a press conference, announcing to the country and to the world that Ireland had taken this drastic step to safeguard the Irish banking sector.

Lenihan thought it important to contact Europe’s senior politicians personally.

Christine Lagarde, then France’s finance minister, was furious with Ireland for taking such a massive decision without any warning, as was the British chancellor of the exchequer, Alastair Darling.

At 10.30am on Tuesday, the cabinet met for an extended discussion on the guarantee, before what was to be a rather chaotic beginning to the debate in the Dáil on Tuesday night.

“The cabinet meeting was a difficult affair, there is no doubt about it,” said Pat Carey, with significant understatement.

Christine Lagarde
Christine Lagarde

Ministers, who were angry at being sidelined the night before, were brought up to speed as to what exactly had happened.

Despite their disagreement the night before, at no time during the Tuesday morning meeting did ministers observe tension between Cowen and Lenihan, only unity.

“There was no sense of that the following morning… there might have been a reference to ‘some officials wanted nationalisation but we still have the legislation’… there was no sense of argy bargy,” said Micheál Martin, recently appointed to foreign affairs.

As Carey was leaving the cabinet room, someone came and whisked a draft copy of the guarantee legislation out of his hand.

“I didn’t have it long enough, but it struck me that it was an unusual-looking document, because as whip I would be well used to the layout of the Oireachtas print,” he said. “I thought it was on different-coloured paper and the font was different.

“I still have a nagging thing in the back of my head — that it was something that came from Trichet’s office. I can’t remember precisely, but I think it was Paul [Gallagher, attorney general]. I haven’t spoken to him about it, and I had it for 30 seconds in my hand.”

That day, amid a growing sense of unease and confusion, the Dáil debate on the bank guarantee was delayed four times.

During his contribution in the Dáil, a weary Cowen strongly defended the move to introduce the guarantee. The Dáil sat until 11.40pm and adjourned until the following morning.

Shortly after 2am on Thursday, the Dáil overwhelmingly passed the bill, by 124 votes to 18, after a number of changes had been made to the legislation.

Fine Gael, despite having some concerns, voted en bloc with the government, as did Sinn Féin, while Labour voted against it.

The legislation was then passed in the Seanad, and Lenihan attended the Upper House until well after 2.30am.

Reaction to the guarantee was decidedly mixed. On radio the next day, Colm McCarthy, UCD economist, said the government was punishing the prudent banks and rewarding the reckless.

“What the Irish government has done is written a blank cheque for double the country’s GNP. This could cost an awful lot of money,” he said.

Cowen knew the size of the call made on issuing the guarantee.

“I knew it was a big call and it was a call that had to be made,” he said. “You had a lot of worries during that time and subsequently about it, to try to make sure that we got EU approval for it.

"I knew politically it was putting us in a difficult position, and I knew it wouldn’t be a popular decision.”

Initially hailed as a bold move which rescued Ireland, the guarantee ultimately locked the State into a position whereby the losses in the banks ultimately sunk the nation.

Material in this piece drawn from the book Hell at the Gates by Daniel McConnell and John Lee, published by Mercier Press

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