Friday 28 November 2014

Merrill Lynch got Irish bank bailout cost wrong – by €48bn

Joe Brennan

Published 21/03/2014 | 02:30

Brian Lenihan was Finance Minister at the time of the bank rescue
Brian Lenihan was Finance Minister at the time of the bank rescue

Merrill Lynch told the Government back in 2008 that it would cost a maximum of €16.4bn to rescue banks. In the end it cost four times that amount.

The Government paid Merrill Lynch a hefty €7.3m in return for banking advice in 2008 and 2009.

The expensive advice was contained in a 45-page presentation to the Department of Finance given in November 2008. Merrill estimated the recapitalisation costs at between €6.5bn and €16.4bn. The firm weighed a series of merger options between Irish lenders as well as the creation of a nationalised bank to wind down toxic commercial real estate loans.

Since then, taxpayers have been forced to pledge about €64bn to rescue the nation's banks after the worst real estate crash in Western Europe.

"Merrill Lynch completely underestimated the capital shortfalls within the banks, but the whole exercise was rushed after the guarantee," Sinn Fein finance spokesman Pearse Doherty told Bloomberg in an interview.

Mr Doherty obtained the information in a Dail question. "The role of external advisers, including bank auditors, really needs to be looked at as part of the banking inquiry."

Victoria Garrod, a spokeswoman for the owner of Merrill Lynch, declined to comment.

Merrill estimated now-defunct Anglo Irish Bank would cost €5.63bn to rescue, a fifth of its final cost. It assumed Allied Irish Banks would need €5.62bn. Within three years, the State had injected almost €21bn into the bank, in which it now has a 99.8pc stake. The investment bank's €4bn Bank of Ireland projection was near to its €4.8bn taxpayer rescue, which has since been recouped by the Government.

RATIOS

Merrill's advice was based on increasing banks' core Tier 1 capital ratio, measure of financial strength, to 8.5pc. Ireland's bailout troika demanded in 2010 that enough capital be injected into the lenders to ensure the measure remained above 10.5pc. AIB's ratio is around 15pc while Bank of Ireland has a ratio of about 12.2pc.

It was not the first time Merrill Lynch got things wrong when it came to the Irish banks. Months before the bank guarantee, Phil Ingram who was a research analyst for Merrill Lynch in London, published a report that warned about a future banking crisis and told customers to sell shares.

Following complaints from Irish bankers, Mr Ingram's report was retracted by his superiors within hours and then edited to tone down the comments. Merrill had been a lead underwriter in the sale of Anglo Irish's bonds and the corporate broker to Allied Irish so their complaints were taken seriously.

Bloomberg

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