On September 6th last year, just two weeks before the full international financial crisis hit, David McWilliams went on the radio to warn that Irish banks were in grave danger of going bust.
Finance Minister Brian Lenihan, who was on the same programme. accused McWilliams of "dangerous talk".
But afterwards, as they left the 'Saturday View' studio in RTE, Lenihan suggested that they get together to talk about the banks -- although nothing definite was arranged.
Over the next two weeks the financial crisis reached a peak in New York. First it was Lehmans, then Merrill Lynch, then AIG. McWilliams believed Irish banks, with their mountain of bad loans, could go belly-up within weeks.
And he knew that the minister was getting unreliable and misguided advice because he was listening to the banking and political establishment, who continued to bluff and bluster that the Irish banks were well capitalised and in no danger.
On September 16th -- the day AIG went bust -- McWilliams appeared on 'Prime Time'.
He again warned that the banks were bust and again the establishment -- this time in the guise of the head of the Irish Banking Federation -- accused him of "loose talk".
Driving home from RTE that evening, McWilliams decided the situation was so serious and the bankers in such denial that it was time to call the minister.
They arranged to meet.
Even so, he was a little surprised when, late the next night, there was a loud knocking on his front door. Standing alone on the doorstep was Brian Lenihan. . .
In this exclusive extract from his new book 'Follow The Money', David McWilliams tells the story of the late-night session with the minister and how they came up with the bank guarantee scheme:
On Wednesday, September 17th, at 10.20 in the evening there was a knock on our front door. Our bell was broken, so the visitor had to knock loudly. I hoped he wouldn't disturb the children, who had woken as I'd gone out to Centra for milk and biscuits 40 minutes earlier. It was late and it was a school night.
The phone had rung about an hour before, so I was expecting him. Even so, as we'd never had a politician in our house, never mind a Minister for Finance, seeing the bulk of Brian Lenihan at the door came as a surprise.
In fact, I had only once met the minister before and that had been in an RTÉ radio studio for Saturday View less than two weeks previously, on September 6th. That day he was confident and calm. The man who appeared at my door was a different character. There was still the confidence and yet he was nervous and fidgety. His suit looked as if he'd slept in it. He had heavy bags under his eyes, his tie was undone and he held a copy of that day's Irish Independent.
Days before this late-night visit, Lehman Brothers had gone bust. That was on Saturday, September 13th. Merrill Lynch went on Sunday, 14th, and AIG -- the world's largest insurer -- went bang on Tuesday, 16th. The financial world was collapsing and the Irish banks were worth pennies, not pounds; cents not euros. The banks were running out of money.
Ordinary people were beginning to panic. We were starting to twig that we had been lied to. My mother had called me earlier in the day to ask whether she should take her life savings out of Bank of Ireland. I told her that the risk was now too great and there was only one thing that could be done: take your savings out and put them in a continental bank trading here. After all, the morons who got us, and their banks, into this mess wouldn't shed a tear for her, so why should she worry about them?
If something radical was not done and done quickly, it was crystal clear to me that the Irish banks would experience a traditional run, with depositors taking out their savings, and the banks would go bust. That one thing, at least, was certain.
The minister walked straight through the hall and headed directly into the kitchen as if he knew where he was going. Jaded, he sat down and turned off his phone.
Our dog Sasha -- a Labrador puppy -- got very excited about a visitor coming in the dead of night, way after the children had gone to sleep.
She slobbered all over the minister's suit and tried to make off with his left trouser leg. At least she broke the ice. He laughed and went off on a tangent about dogs, kind of nervously. After a few minutes, Sasha settled down under the kitchen table, rested her head on his brogues and fell asleep.
Taking note of his 12 o'clock shadow and red eyes, I suggested that he should catch a kip too. He said he'd doze off in the car on the way home.
Then he pulled a bulb of garlic out of his pocket and started to peel it. It was one of the odd moments in a long night of odd moments. In subsequent meetings, the raw garlic was produced and squashed into bowls of soup. This time he just peeled a clove and left it on the table.
He explained to me that the garlic gave him strength and kept him healthy and alert. I had no reason to doubt him. He went on to say that he had been chomping raw garlic all summer, since he'd got the Finance job.
I didn't know what to think but when you have the Minister for Finance of a country that is going down the tubes sitting opposite you at your kitchen table, about to wolf down raw garlic, you have to suspend your disbelief.
I made him a cup of tea. That was to be the first of many that night. We asked the driver would he like a cup of tea too. He said no. Had he known how long we were to talk, he'd probably have asked for a camp bed.
I felt sorry for Brian Lenihan that night. He looked exhausted. He had been working day and night and he was trying to understand everything. This must have been very difficult for a man who had spent all his life in law. I thought to myself that this would be like me being thrown in as Attorney General in the middle of the country's worst constitutional crisis. I wouldn't know where to start.
He told me he'd been breaking himself into the job and economics by reading Alan Greenspan's biography.
"Sweet Jesus!" I thought. That was the worst place to start. That epoch was over. It was like a Minister for Transport a hundred years ago trying to learn about cars by reading a book about fast horses. Greenspan's nonsense caused this mess and I told the minister as much.
With that out of the way, I got a pencil and paper and we started scribbling. This was the way I'd learned economics years ago, always joining the dots as if you are piecing together a big puzzle. If that is related to this, then this will happen and if that happens, this is likely to move and so on and so on.
He gave me the impression that he was quite isolated from his officials. He repeated again and again, "They just don't get it; we don't have much time."
He was confused but was getting to grips with things. I offered him a glass of wine. He told me he wasn't boozing until after the Budget. I said the Budget was the least of his worries.
That night, even after a few minutes, it was clear that here was a man who could pick things up quickly. But we were starting pretty much from scratch. It was also obvious that he was, at best, sceptical about the advice he was getting. Given the spin that was coming out of the Government, I wasn't too surprised and I was quite relieved that he doubted the Regulator and the Governor of the Central Bank when they continued to parrot platitudes about the banks being fine and being stress-tested.
He kicked off by saying if his officials knew he was here in my house, there'd be war. They thought I was a maverick. I took it as a compliment.
He got to the point quickly. He was sitting opposite me and he had a habit of looking around rather than catching my eye as if he expected someone to join us at any minute. I told him we were on our own, just the pair of us and the puppy.
He leaned over and, in a hoarse voice, almost whispering, he said: "What would you do?"
McWilliams explained to the minister that he had worked in the Central Bank during the 1992/1993 currency crisis and knew from experience that the mandarins wouldn't do anything out of the ordinary even when the situation was desperate. And having also worked in two of Europe's largest investment banks in similar banking crises in Russia, Asia and Argentina, he knew that radical action was the only thing that could prevent catastrophe.
I asked him how bad the situation was. He was guarded, as I expected him to be. But it soon became clear, as he revealed, "The situation is worse that even you think and we all know what you think!"
I took this to mean not only that the banks could not roll over their debts, but that he had only just been told this truth. We had weeks at best, days at worst. My own reckoning was that the banks had a few weeks' financing. The minister indicated that the problem was more acute. The most revealing thing about our conversation was that it was AIB, not Anglo Irish, that had the most severe funding problems.
Ireland's biggest bank was actually our biggest problem. I was aware that the Irish banks could no longer finance themselves and were borrowing in the very short-term and rolling over. This is why I'd warned on September 6th on Saturday View that we would have a banking crisis. What I didn't know was the bank that was pretending to be the most prudent was possibly the most delinquent. We were on the precipice.
On the table from the Department of Finance was a plan for the two big banks to take over Anglo Irish Bank and Irish Nationwide. I reminded the minister that they were all at the same game and merging them wouldn't ease the liquidity crisis because two bad balance sheets didn't make one good one. . .
So we to-ed and fro-ed with what had been done before. I had worked for UBS (Union Bank of Switzerland) in Zurich in the years after Switzerland experienced a banking crisis in the early 1990s. The Swiss government guaranteed all liabilities of the banking system even though the banks' balance sheets were a number of times bigger than the country's GDP. A guarantee had worked there.
I'd also worked in Sweden where I'd seen the Swedes guarantee all their deposits in the face of a banking crisis. I told the minister it seemed to me that Sweden's reaction was an interesting place to start.
Above all, we needed to protect the ordinary savers, not bond or equity holders. They were playing a different game. They were in the business of gambling. But the savers, the ordinary people who had bank accounts, needed protection.
The crux of the issue was that the problem had gone way beyond normal remedies. The minister was aware of that.
The officials in the Department were (by then) also advocating a guarantee of people's deposits but only to a certain level. However, I argued because the Irish banks' funding had become so unstable, if we didn't guarantee the funding as well as the deposits, the banks would come crashing down and you would have had to come up with the money immediately for people's deposits. The whole point of a guarantee is that you want to avoid paying out right away.
Now, on September 17th, we were stuck and only the nuclear option would work. Over tea and digestive biscuits, to the background noise of the gentle snoring of the puppy, the minister naturally worried about pushing the button.
I showed him an article I had written earlier that evening which outlined the bank guarantee plan. I had wanted to get the idea down on paper so that I was clear. Because we were all groping in the dark. This was economic policy-making formulated in a kitchen and made up on the spot.
He was worried that this guarantee idea was too radical. And I could understand this because he was the man who had to make the decision, not me.
I told him he simply had to guarantee everything for a limited period to make sure that an illiquid dilemma didn't lead to an insolvency catastrophe.
But, he argued, warming to the idea, what if we got the insolvencies? We could never afford to cover all the liabilities. This was the risk, a huge risk, but one that could be reduced if the guarantee was not extended beyond a fixed period. I argued that over the two years of the guarantee, the true extent of the bad debts would become apparent as would the depth of the recession and, armed with this knowledge, he could then choose which banks to save, or not, in an orderly fashion.
I said that this was not the perfect solution but we were in a crisis and anything we did now was from a position of weakness. The US had let Lehman go and it had prompted the market to freeze up. It had written a huge cheque for its banking system's toxic debt; we didn't have the money to do this so couldn't. There was simply no alternative.
We had to do something that cost nothing in the immediate term but might stop the money flowing out of the economy. Otherwise the system would break and with it would go the savings of thousands of ordinary people. We both agreed that this would mean saving banks that probably didn't deserve to be saved but I contended that we didn't have time to disentangle the good from the bad. This way, if the plan worked, he and his officials would have time to unpick the mess.
Meanwhile it would be essential to make the guarantee conditional so that the minister would be in control and the banks would be working for him, not him working for the banks.
That night, it never struck me that the banks would be allowed to get away with what they did in subsequent months.
We outlined how the plan might work on a piece of paper. It was well past one in the morning when we decided to call it a day. He stuffed the paper in his pocket and was about to go when he said he'd have another cup of tea.
The chat ebbed and flowed and there was more tea. I felt like Mrs Doyle by this stage. He wouldn't take a drink and, by the time we finished up, it was nearing two.
I walked him out to his car and he reiterated the fact that his officials would explode if they knew he was there. I said I wouldn't tell a soul if he didn't.
The minister called me the next day and again on Friday, the 19th, when he rang to say they were contemplating a partial guarantee. My view was that such a move would accelerate capital flight, not avert it. From then on, we spoke on a daily basis, but he still wasn't convinced and, from what I could gather, his officials in the department were dead set against a full guarantee, although they didn't seem to be coming up with an alternative.
McWilliams flew to the World Economic Forum in China that day but used his weekly articles to outline the plan and how it would work.
Over the following week, I wrote three articles advocating the guarantee as the only option: on September 21st in the Sunday Business Post; on September 24th in the Irish Independent; and finally on September 28th in the Sunday Business Post -- the day before the guarantee was announced.
Throughout the week in China the minister was on the phone, but it seemed to me that the guarantee would not be introduced as the officials still thought a merger of the bigger and the smaller banks was the right way to go. On Saturday, September 27th, the phone rang.
"Are you sure about this, David?"
"No, Brian, I'm not sure it will work. But I am sure of one thing: we have no alternative."
He had to make up his mind. It was an impossible situation. I could sense down the phone a man with the weight of the world on his shoulders.
He phoned again on Sunday, September 28th; he was like a different person. He was joking and in good spirits and he seemed to be relieved. I couldn't figure it out. I had no idea whether he had made a decision either way. He asked about Beijing and what it was like.
I wished him luck in the week ahead. He chuckled and said he might need it.
I touched down in Munich on Tuesday morning after an overnight flight from Shanghai. My phone rang. It was RTE radio. Sean O'Rourke demanded to know how the guarantee would work. He said the latest article, together with the two previous ones, constituted, according to him, the only blueprint out there.
A little later the minister called me. He was euphoric.
I suggested that he should really go for it now. He could orchestrate a clean sweep of the old regime.
I put the phone down, thinking that we were in a position of strength and hard decisions would flow from this, and the people who had brought the country to its knees would be brought to theirs. I expected our most delinquent banks would eventually go to the wall with the Irish State acting as broker, not principal, in negotiations between the bankrupt banks and their creditors.
How wrong could I have been?
Follow the Money: The Tale of the Merchant of Ennis by David McWilliams (Gill & Macmillan), €16.99.