Thursday 22 February 2018

Banking Inquiry: First reference to blanket guarantee made to NTMA three days before

Brendan McDonagh with the late Brian Lenihan (left)
Brendan McDonagh with the late Brian Lenihan (left)

Clodagh Sheehy

THE first and only reference to a blanket bank guarantee made to the National Treasury Management Association came in an email three days before the decision, the Banking Inquiry has been told.

Brendan McDonagh, former director of Finance, Technology and Risk at the NTMA said he had been sent the email by Assistant Secretary of the Department of Finance, William Beausang.

In the short time available he discussed it with his colleague and replied that “the real exposure to the Exchequer from the banking system had not yet been independently quantified and would make any assessment of a bank guarantee extremely difficult”.

Mr McDonagh said the email referred to a possible total funding requirement of about €100bn for the two institutions expected to be nationalised - Anglo Irish Bank and Irish Nationwide Building Society.

This was in addition to a wider guarantee for the other institutions.

Read more: Quinlan tells Banking Inquiry: I miss Ireland every day since becoming a tax exile

“I pointed out that, in the event that such a major decision was made, the credit ratings agencies would be ‘taken aback’ at the scale of State involvement that a blanket guarantee would necessitate,” he said.

He told the inquiry he also said there would be “an immediate credit ratings downgrade of Ireland from AAA and a concomitant rise in the cost of funding the National Debt.”

He had made the observation that given the potential size of any guarantee relative to the size of the Irish economy, “Ireland could expect to pay “a lot more than Greece” in the international money markets .

“There was no follow-up from the Department to my email.”

He said all signs were pointing to Irish Nationwide Building Society and Anglo Irish bank being nationalised, the suggestion of a blanket guarantee came out of nowhere.

Mr McDonagh said from mid September that year at meetings which the Department of Finance had scheduled with the Central Bank and the Financial Regulator it was obvious to him there was a dearth of information or analysis in terms of real insight into the state of the domestic banks and building societies.

“It surprised us that there appeared to be only one or at the most two Financial Regulator staff engaged in close monitoring of each financial institution, even those institutions with balance sheets of up to €200 billion.”

The whole focus was on having legislation ready to nationalise a building society and a bank if required.  The NTMA had provided technical input into that draft legislation.

The NTMA had been requested to increase deposits placed with the Irish banking system as institutions rapidly began to lose liquidity.

They had refused as it was the view of the Chief Executive, Dr Michael Somers that it was the role of the Central Bank to be the lender of last resort.

It was not the role of the NTMA as a debt management agency and this had caused “considerable tension but the NTMA maintained its position.”

Mr McDonagh said there was a very strong view in the NTMA that INBS and Anglo should have been nationalised.

He said they were always sceptical about Anglo, its business model and its funding was also under pressure.

Anglo should certainly have been nationalised on the night which might have allowed certain actions to be taken sooner, he added.

He believed the markets had made their decision about banks like Anglo in March 2008 when the share price collapsed.

He also believed that more preparation could have been done for a Guarantee in the months leading up to it.

Later, former NTMA chief executive Michael Somers  said the Bank Guarantee was probably the best course of action to stop a run on the banks.

The enormous amounts banks lent to individual developers to enable them to pay extraordinarily high prices for property and the rolling up of interest meant that “insolvency was almost inevitable”

Mr Somers said when PcW reviewed the banks’ loan books at the end of 2008, at that stage the damage had been done and the only question was the scale of the disaster.

“The early review underestimated the size of the ultimate losses, much larger State support was later required.”

The nationalisation of Anglo in 2009 was “probably inevitable. By then there was nothing to indicate that it had a future as a privately owned institution”.

The former chief executive said he supported Minister Brian Lenihan’s decision to set up NAMA.

At his request he also went to see ECB boss Jean Claude Trichet “to tell him that we would need about €60bn from the ECB to fund it.”

Mr Somers was “hesitant about the amount of money that was going to be paid into the banks and the rapidity with which it was to be done.  The Minister felt it would free up the banks  to start lending again.”

He said he felt “we should take just some loans from the banks and see if that would encourage them to start lending again.

“I also felt the banks should be pressed to recover the loans themselves as they knew ‘where the bodies were buried’

“Transferring them to NAMA would be a bonanza for lawyers and other professionals as well as requiring a large staff in NAMA”.

He conceded that at the end of the day “regardless of what happened the likelihood is that the outcome would have been the same.”

By the 2007 election he was surprised that public expenditure was not cut back and he also felt the level of house and apartment building was unsustainable by any measure.

He was aware that costs and prices in Ireland were rising more rapidly than elsewhere in euro-land.

“These issues are difficult to correct, particularly in the absence of a crisis and where so many people are benefiting.”

Mr Somers stressed that the NTMA had provided as much assistance and advice as it could during the financial crisis “based on the experience and knowledge we had”.

At the end of 2009 it had €21.8bn in liquid assets to fund the Exchequer into the future and €22.3bn in the National Pensions Reserve Fund.

By the time it was brought into the deliberations on the banking crisis, there were no easy solutions.

Mr Somers concluded that the fact that the NTMA existed and had prudently managed its operation, “the State was in much better condition financially to tackle the crisis than would have otherwise been the case”.

Asked about NTMA representatives being left outside the door on the night of the Guarantee, he said this was not unusual.

He stressed they were not part of the inner circle in fact “we didn’t even know what we didn’t know”.

He described coming under pressure in 2007 to put money into Anglo and when they agreed to put in €40bn the NTMA came under renewed pressure for more money but resisted.

He said he learned to his “dismay” that the money was on deposit for 12 months and tried to get insurance for this money in case the bank went bust but the costs were “off the wall”.

Asked by Deputy Michael McGrath if he thought Anglo was going to fail he said it was a possibility.

He did not know anything but felt “jumpy” and was concerned about the possible loss of State funds.

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