Business Irish

Monday 16 September 2019

24 hours that shook the nation: The story of the €400 billion bank guarantee that led to a lost decade

The big read: In the early hours of September 30, 2008, Brian Cowen and Brian Lenihan hatched a plan with bankers and officials to save Irish banks with a €400bn guarantee. But did this hastily agreed deal result in economic ruin? Kim Bielenberg reports

Urgent action: During their long night of negotiations, the late Brian Lenihan, then Finance Minister, wanted to introduce a limited guarantee, but was overruled by then Taoiseach Brian Cowen
Urgent action: During their long night of negotiations, the late Brian Lenihan, then Finance Minister, wanted to introduce a limited guarantee, but was overruled by then Taoiseach Brian Cowen
The calm before the storm: Anglo Irish Bank's Group Chief Executive David Drumm and Sean FitzPatrick at the bank's AGM on February 1, 2008
Perfect storm: Shares across the world slumped on September 29 and 30
Eugene Sheehy, CEO of AIB Group, left, chats with chairman Dermot Gleeson.
A Gorey ghost estate, a symbol for the folly of the Celtic Tiger years. Photo: Mary Browne
Kim Bielenberg

Kim Bielenberg

The fate of Ireland was sealed over half-drunk cups of coffee and convenience-store sandwiches in the middle of the night in the heart of Government Buildings exactly 10 years ago.

As "meltdown Monday", September 29, turned into night, and talks continued into the tense small hours of the morning of September 30, the then Taoiseach Brian Cowen and the then Finance Minister, the late Brian Lenihan, were bunkered down in discussions with bankers and civil servants.

They were engaged in a frantic bid to save the country's financial institutions.

Cabinet ministers were called bleary-eyed from their beds to the phone to hear the latest details of the plan to guarantee the customer deposits and borrowings of the Irish banks to the tune of €400bn.

The calm before the storm: Anglo Irish Bank's Group Chief Executive David Drumm and Sean FitzPatrick at the bank's AGM on February 1, 2008
The calm before the storm: Anglo Irish Bank's Group Chief Executive David Drumm and Sean FitzPatrick at the bank's AGM on February 1, 2008

Willie O'Dea, then Minister for Defence, told Review how he was woken late in the night to be told of the plan: "I was briefed on what the Taoiseach and the Minister for Finance wanted to do. They wanted my assent and it was put to me that this was absolutely essential or the whole financial system would topple in the morning."

By the time they headed home at around 4am with a plan cobbled together in a somewhat haphazard fashion, Cowen and Lenihan - both red-eyed and exhausted - were said to have each looked like they had done 15 rounds of kangaroo boxing.

For much of that fateful week, Lenihan barely slept at all.

The events of that tumultuous night were to have aftershocks that are still being felt until this day.

According to the latest estimates, the banking bailout that followed the guarantee has ultimately cost the Irish taxpayer up to €50bn.

The economist Brian Lucey, Professor of Finance at Trinity College, told Review: "On that night, we tied ourselves to the banks and they sunk - and we had to do a lot of bailing out."

A Gorey ghost estate, a symbol for the folly of the Celtic Tiger years. Photo: Mary Browne
A Gorey ghost estate, a symbol for the folly of the Celtic Tiger years. Photo: Mary Browne

The banking collapse was not the only cause of the Great Recession, but it contributed in no small way to half a decade of austerity.

Within weeks, with the national debt mounting, workers were pickpocketed in a hair-shirt budget through tax hikes - and public spending was slashed.

Unemployment surged in the years that followed to over 15pc, and close to half-a-million people left the country.

The bank guarantee came at the end of a month when the financial world was turned upside down, and callers flooded RTÉ broadcaster Joe Duffy's Liveline with stories of taking out thousands of euro in cash, and stuffing it behind mattresses or burying the notes in the garden.

On September 15, Lehman Brothers, a huge US investment bank and one of the pillars of Wall Street, closed and announced liabilities of $600bn.

As shockwaves were felt around the world, attention inevitably turned to the health of the Irish banks, which had surfed the wave of a boom on the back of dodgy loans to property developers.

One Anglo employee recalled in an interview the sense of trepidation at that time inside the bank: "We had a large-screen TV in reception and I remember Lehman staff leaving with their boxes - and everyone thinking that was going to be us, that's what was going to happen here."

Matters came to a head on September 29, when global stock markets plunged. Investors rushed to sell off shares in Irish banks, Anglo shares plummeted by 46pc, and the Irish ISEQ stock market suffered the worst day in its history.

Depositors rushed to take their money out of Anglo, prompting fears it might not survive until the following day - and there was also the prospect that the other Irish banks might fall like a row of dominoes.

With money flooding out, two of the central figures in the banking crisis, Anglo chairman Seán FitzPatrick and chief executive David Drumm, were scrabbling around frantically -like householders looking for cash at the back of the sofa.

They were now in a desperate position and contacted bosses from other banks seeking help.

They drove to Bank of Ireland's HQ on Dublin's Baggot Street, entering up the back stairs, to meet chief executive Brian Goggin and chairman Richard Burrows. But they could offer no comfort.

They also sought help from Dermot Glesson, chairman of AIB, but he couldn't help them.

Alarmed by the unfolding situation and the precarious position of Anglo, Burrows and Gleeson conferred with each other, and decided that as a matter of urgency, they needed to contact Cowen and Lenihan for a meeting.

By 6pm, with the financial markets closed, it was dawning by then on the Taoiseach and the Minister for Finance that urgent action was needed overnight. Lenihan arrived in Government Buildings from the nearby Department of Finance for a meeting with the Taoiseach and officials.

It was to be the start of a long night, and accounts have differed about what exactly happened - and how the decision on the guarantee was reached.

There has been much speculation since about who was really in charge on the night in question. Lenihan was relatively new to the job, having taken over from Cowen as Finance Minister in May.

According to some accounts, Lenihan wanted to nationalise the two most troubled institutions, Anglo Irish Bank and Irish Nationwide Building Society, and introduce a limited guarantee, but he was overruled by Cowen.

Professor Lucey says: "Cowen wanted to make it clear that the Government and the State were in it with the banks."

At one stage during the marathon late-night session, Cowen was reported to have thumped the table and said: "We're not f***ing nationalising Anglo." But he later said he didn't recall making the remark.

In evidence to an Oireachtas Banking Inquiry, Prof Patrick Honohan, who served as Governor of the Central Bank of Ireland in the years after the collapse, said Lenihan had told him he argued strongly not to cover the banks' subordinated debt - the funding provided to banks by investors for a higher-risk premium, but the Finance Minister had eventually backed down.

While Lenihan won praise for his bullish demeanour and courage during the financial crisis, some of his critics found him indecisive.

One official, who was present for the entire night, told Review: "There is no doubt that Cowen was the boss. The trouble with Brian Lenihan was that he found it difficult to make a decision. You could put 10 options in front of him and he would want 20."

On the other hand, supporters of Lenihan might argue that his initial caution about the extent of the guarantee, as reported by Honohan, was well justified by the events that followed.

The senior bankers were ushered to and from the building in the utmost secrecy on the night.

A civil servant who spotted a bank executive in the building enquired about what was happening.

"For God's sake, don't say anything," she was told. "You'll have a run on the banks!"

The chairmen and chief executives of the two biggest banks slipped into Government Buildings at 9.30pm that evening. There were no representatives from Anglo Irish Bank.

The bankers were left waiting for two hours in the Sycamore Room before they outlined the case for a guarantee to Cowen and Lenihan.

The AIB chairman Dermot Gleeson later told the Banking Inquiry that during the evening a slip of paper from AIB - prepared that afternoon and in the handwriting of himself or then chief executive Eugene Sheehy - was used in the wording of the guarantee.

The food on offer to the assembled officials on the night suited the austere mood of the time. At one stage, a crate of sandwiches was fetched from a nearby Spar shop and these were quickly wolfed down.

By 3.30am, the wording of the comprehensive €400bn guarantee was agreed - but at least one of the parties involved left the building with a different impression of what was agreed to what actually transpired.

When the unsuspecting Irish public and the financial world woke up to the news of the guarantee, there was a varied response to the news.

In his column in the Irish Independent on the following day, economist David McWilliams said Lenihan had made a "wise choice" and he described the guarantee as a "masterstroke".

But others were worried about its effect. Labour leader Eamon Gilmore said: "It is a guarantee that, if it were called in full, would take 37 years of income tax receipts to clear." Gilmore said he could see what was in it for the six bank chief executives who between them earned €13m a year, but he couldn't see what was in it for the people who might yet foot the bill.

So was it a reckless and foolish guarantee that should have never have been countenanced, and what were its effects?

Professor Brian Lucey vividly recalls meeting members of the US Federal Reserve Board in the days that followed.

"I explained to them what we had done in Ireland. They were gobsmacked and horrified at the potential liability that the Irish government had taken on. They were not convinced."

Professor William Black from the University of Missouri, a former director of the Institute for Fraud Prevention in the United States, later told the Banking Inquiry that the extent of the guarantee was "insane" and the "most destructive own goal in history".

The guarantee announced in September 2008 left taxpayers on the hook for massive losses. Despite being put in place to bring stability to the banking sector, investors realised the State could not cover the liability and the Troika of the IMF, the European Central Bank and the EU eventually had to ride into town with a rescue package two years later.

Looking back on the guarantee 10 years later, Professor Lucey says that by going to the maximum in guaranteeing the banks, including Anglo and higher-risk bonds, the Government staunched the bleeding. The problem was that we were shackled to the banks when they went down - and we went down with them.

"Everyone was making up policy on the fly, and inevitably they got things wrong and the problem was that many of these decisions were irreversible."

Already by the autumn of 2008, the effects of the banking crisis and the great recession were being felt on the ground. By the end of the year, most workers felt lucky if they were still in a job and many were already suffering the effects of pay cuts.

As credit dried up, unfinished building sites were shut down and the staff laid off, leaving ghost estates all across the country. These became the heavily-photographed symbols of Celtic Tiger folly in newspapers across the world.

With many families struggling to pay their mortgages and repay their debts, poverty levels increased.

In his budget speech of 2009, Lenihan boldly declared with a Churchillian flourish: "Our plan is working. We have turned the corner."

But the State's finances were to get a lot worse before the Troika arrived, and Ireland lost part of its sovereignty.

The country may have recovered, but it still has a heavy burden of national debt that has grown from €50bn to over €200bn since 2008.

Professor Lucey says it is important to emphasise that not all this spiralling debt was caused by the banking crisis.

"Of the total increase in debt since 2008, about one-third was due to the banks, and two-thirds of it was due to the fact that the State was running a taxation system that was incapable of withstanding a knock."

Lenihan has been blamed for the wide scope of the bank guarantee and the inevitable economic woes that followed when the banks had to be bailed out.

But his defenders might argue with some justification that Lenihan had taken over a few months before when the ship of State was already heading speedily towards the rocks, having been captained by Bertie Ahern, assisted by his first mate Cowen.

The property bubble had burst, leaving banks and many householders underwater. The guarantee may have made things worse, exposing the State to huge losses, but after the overborrowed free-spending years of the Celtic Tiger, the economic crash was inevitable.

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