It was a Frankenstein solution undertaken with high hopes but what a costly experiment it proved to be. And while we know the bank guarantee went hideously wrong, we are still unclear how such a monster came to be bolted onto the Irish state.
That vacuum of knowledge, that lack of public accountability, continues to create a democratic deficit – even as we hear promises of a long overdue inquiry later this year.
The notorious 2008 guarantee – which landed citizens with a €62bn bill and paved the way for the arrival of the troika – is to end next month. The coup de grace is earlier than expected, bringing with it a reminder that much remains vague about the night of September 29, 2008.
Four and a half years on, reasons for introducing a blanket guarantee continue to go unexplained. None of the key players has yet faced rigorous questioning in a public forum for their actions. Indeed, many have slipped quietly into the background – on bloated state pensions.
However, Brendan Howlin’s Public Expenditure and Reform department is drawing up legislation for an inquiry, including a vital component: compellability of witnesses. Some people may be reluctant to cooperate but full participation is essential. It is also bottom-line for all hearings to be public.
Here’s what we do know. The blanket guarantee was agreed at breakneck speed by a mere handful of people, which gives rise to the suspicion that alternative options were inadequately considered.
During midnight oil deliberations, a decision was taken to guarantee “the deposits, loans and obligations” of the six Irish banks and make taxpayers liable for any losses – the equivalent of handing over a blank cheque to banks with bad debts. Only a semblance of democracy was maintained with that incorporeal cabinet meeting by telephone.
The guarantee was announced the following morning to an astonished public, and rammed through the Oireachtas. Citizens woke to discover the economic landscape had changed fundamentally.
Gone now is John Hurley, then governor of the Central Bank, who failed to spot Irish banks’ exposure to the unravelling property market. Gone, too, is Patrick Neary, the Financial Regulator who urged bankers to don the green jersey for each other as the crisis developed. Yet we need to hear from them, and from others.
Those others include Brian Cowen, who was Taoiseach, and from the Department of Finance’s principal civil servants present during that long night: secretary-general David Doyle, now retired (on his watch the boom only appeared to get boomier), and Kevin Cardiff, then head of its Taxation and Financial Services Division, now relocated to a cushioned position at the European Court of Auditors.
Bring back the erstwhile blue-chip bankers and let’s hear what they told the kitchen cabinet: Bank of Ireland’s Brian Goggin and AIB’s Eugene Sheehy, along with their respective chairmen, Richard Burrows and Dermot Gleeson.
Today, Sheehy is a history student at Trinity, while Goggin advises private equity firm Apollo Management on the purchase of distressed assets.
Guaranteeing the banks was an extraordinary step. It meant if any bank discovered subsequently it had unmanageable bad loans, the taxpayer would bear the cost. Such a result was highly probable since excessive lending was the order of the day – greased by the bankers’ bonus culture which rewarded risk-taking.
The option chosen to avoid Armageddon – an all-encompassing guarantee – actually precipitated it.
Understandably, people are wary of yet another enormous bill for public hearings. Yet an inquiry must take place to reveal why the State took the action it did, and on what advice. An efficient and cost-effective model could be adopted, such as Britain’s Hutton Inquiry, which reported inside six months.
There have been three reports into the banking collapse, the most useful of which was Patrick Honohan’s in June 2010. His language is diplomatic but his analysis indicates the previous government botched up by not implementing a limited guarantee.
“The inclusion of subordinated debt in the guarantee is not easy to defend against criticism,” he writes. “The arguments that were made in favour of this coverage seem weak… Inclusion of this debt limited the range of loss-sharing resolution options in subsequent months, and likely increased the potential share of the total losses borne by the State.”
He also noted a natural tendency on the part of public servants to avoid “immediate crystallisation of problems” ie economic disruption from banks closing their doors – even at a larger subsequent cost.
Arguments were made against a blanket guarantee, including from the Department of Finance’s advisers Merrill Lynch. Incidentally, an email from Kevin Cardiff to a Merrill Lynch employee was later published, in which he said: “In meet with Taoiseach – need note on pros and cons of guarantee asap.” It was sent at 6.43pm on September 29. The document’s date was only the previous day – reinforcing the high speed nature of decision-making surrounding the guarantee.
Questions which need to be answered include: why not give banks a once-off injection of capital without making taxpayers responsible for their liabilities? Why was a no-failure policy accepted in relation to Irish banks? Why was no attempt made to quantify the possible payout from bad debts? Why was such an expensive option chosen? For example, liquidating Anglo and Irish Nationwide could have saved up to €35bn.
There was a case to be made for a guarantee – but a limited one. Not manna from heaven for junior bondholders and years of austerity for citizens.
It was a pivotal night, the one on which the party ended – not that everybody partied, despite subsequent attempts to convince people otherwise. However, the bar bill was presented to everyone.
Under the circumstances, full disclosure about labour and birth on the night a monster was born is the least to which we’re entitled.