A night of confusion and drama that left a bitter taste
The night of the bank guarantee was fraught with fear, bewilderment and some pretty desperate measures, says Martina Devlin
It was a one-night stand with momentous consequences. During the course of a long, tense night, on September 29, 2008, a kitchen cabinet of a few ministers, mandarins and regulators held back-to-back crisis meetings – culminating in a blank cheque being given to the Irish banks.
Perplexed citizens woke up the following day to discover the economic landscape had changed fundamentally. While Ireland slept, a course of action was set in train with devastating financial implications for everyone in the State.
A decision was reached to guarantee "the deposits, loans and obligations" of the six Irish banks and make taxpayers liable for any losses. The nation's reputation was harnessed to lend credibility to its banks.
Only a semblance of democracy was maintained, with an incorporeal cabinet meeting by telephone, after the inner circle had resolved already on the tactics it would use to deal with the banking emergency.
What precipitated such a battlefield decision? That day, a Monday, the Irish Stock Exchange was gripped by panic. Wealth accumulated over decades melted away, the blue-chip banks collapsing like matchsticks. Irish companies suffered their biggest one-day sell-off in more than a quarter of a century.
Hardest hit was Anglo Irish Bank, whose share price lost almost half its value, plummeting by 46pc. Depositors removed their money in droves, alarmed that the bank was teetering towards collapse.
Finance Minister Brian Lenihan, just four months into the job, realised decisive action was needed. At 6pm, after the markets closed, he hurried across to Taoiseach Brian Cowen's office. Also present at the meeting were financial regulator Patrick Neary and Central Bank governor John Hurley; along with Dermot McCarthy, secretary general in the Taoiseach's department, and key Department of Finance officials David Doyle and Kevin Cardiff. Attorney General Paul Gallagher joined them later.
Half an hour in, Cardiff emailed consultants Merrill Lynch for a copy of the document it had prepared setting out the Government's options. "In meet with Taoiseach – need pros and cons of guarantee a sap (sic)," said his email. A blanket guarantee was among a range of options put forward by Merrill Lynch, although it included a caveat about the impact on the State's sovereign credit rating and overall credibility.
Meanwhile, Bank of Ireland and AIB had made contact with each other and agreed they needed to alert the Government to the vulnerable condition of the banks. An urgent meeting was requested, and a delegation of four of the State's heaviest-hitting bankers gathered at Government Buildings.
Brian Goggin and Richard Burrows, chief executive and chairman respectively of Bank of Ireland, and Eugene Sheehy and Dermot Gleeson, chief executive and chairman of AIB, believed Anglo was on the verge of going under. If the Government did not intervene, they feared one of their banks could be next.
Even as the foursome had the chastening experience of being left to kick their heels for two hours – in the Sycamore Room, once a favourite spot of Charlie Haughey's – Anglo employees were on the town giving the bank a send-off. As far as they were concerned, it was game over. Anglo had run out of cash and no one would lend to it.
Traditionally, when banks lend money, they take it from deposits. But the property bubble lending splurge meant insufficient funds were left on deposit. As the credit crunch gained momentum worldwide, banks became reluctant to advance funds to one another, and Irish banks were frozen out. They were regarded as exceptionally vulnerable because of their enormous exposure to property.
Finally, the four bankers were brought into the Taoiseach's oak-lined office, dominated by a portrait of Éamon de Valera. Jacket off, Cowen chaired the meeting while Lenihan did the lion's share of the talking on the government side. In the main, however, they listened intently to the bankers' grim report: Bank of Ireland and AIB, once regarded as impregnable, had enough money to continue operating for a matter of weeks only.
The bankers asked the Government to nationalise Anglo and possibly Irish Nationwide, and guarantee the liabilities of the other Irish banks. They weren't given an answer at once. When they were shown out of the 45-minute meeting, they had the impression Lenihan favoured immediately nationalising Anglo, while Cowen was less keen.
In the bankers' absence, the kitchen cabinet pondered options. A draft piece of legislation had been prepared four months previously, in the wake of the Northern Rock collapse, allowing a bank to be nationalised. But Government officials feared taking Anglo into public ownership would precipitate further nationalisations.
Instead, a plan was devised to fully underwrite Ireland's entire banking network. Covered by this insurance policy were four banks: Bank of Ireland, AIB, Anglo Irish Bank, Irish Life and Permanent – owner of Permanent TSB – and two building societies, EBS and Irish Nationwide.
The guarantee was an exceptional step: it meant if any bank discovered it had bad loans, taxpayers would be liable.
The bankers were escorted back into the meeting room, told what was brewing, and were asked for funds to help Anglo survive.
They said they needed an assurance their money would be repaid by the weekend – worried that Anglo wouldn't last, even with a state guarantee. They pledged €5bn each (it was never drawn down) and the Central Bank also agreed to lend Anglo a further €3bn.
Around 2am, the bankers left Government Buildings, as Neary called the heads of the other lenders, telling them they were included in the guarantee. Lenihan, Cowen and their team turned the Taoiseach's office into a war room and ironed out details of the rescue package. Delaying action until the weekend, when the markets closed, was believed to be too risky.
For some time, it had been known radical steps would be needed. Governments worldwide were reviewing how to safeguard their indigenous banking systems and protect deposits from public panic.
The team laboured until 3.30am drafting revisions. The guarantee had been circulating within the Department of Finance, the Central Bank and Government Buildings for more than a fortnight, and economists had also mentioned it.
However, Cowen and Lenihan were operating in the dark to some extent. They realised there was a credibility gap in bankers' admissions regarding their bad debts – but how wide was it?
Collective cabinet responsibility meant ministers had to be rounded up for an emergency meeting. While a number of senior ministers had already been put on notice, the Cabinet Secretariat now contacted the remainder, advising them to be ready for an incorporeal meeting between 1am and 2am.
Green Party leader John Gormley's mobile had run out of power, and the secretariat could not access him. In desperation, his garda driver was despatched to the minister's home in Dublin's Ringsend.
Now, ministers were given details of the ground-breaking financial pledge, which shouldered hundreds of billions of banking liabilities on to taxpayers. In return, the financial institutions would pay a fee for the cover enabling them to stay in business. The cost was gauged at €440bn on the basis that the banks had liabilities of €440bn and assets of €500bn. That €500bn figure was destined to tumble before the ink was dry on the guarantee.
Ministers assented unanimously. Micheál Martin, en route back to Ireland from the United Nations General Assembly, gave his agreement from a private room in Newark Airport.
At 3.30am, Cowen encouraged Lenihan to go home and put his head down for a couple of hours. It had been an action-packed night – and a busy day stretched ahead.
An advance copy of the guarantee was sent at 4.30am to the European Central Bank, followed by a call from Ireland's central banker John Hurley to its head Jean-Claude Trichet.
Next, a barely rested Lenihan made telephone contact with the French finance minister and chair of EU finance ministers, Christine Lagarde. He also spoke with Luxembourg's Prime Minister Jean-Claude Juncker, Europe's veteran fixer, speaking mainly in French, in which he was fluent.
Europe's response was tetchy. It wanted countries to keep in step, and Ireland had struck out on its own.
The stock markets opened at 8am, and it was clear immediately that the plan was working. As the markets gave the deal a cordial welcome, a halt was brought to the share-price decline of all the major financial institutions. In a matter of minutes, they regained the catastrophic losses of the previous day.
But bedlam erupted in Britain, where the guarantee had reverberations. Chancellor of the Exchequer Alistair Darling rang Lenihan demanding a reversal of the decision, warning money would flood out of British banks. Lenihan replied he had to safeguard Ireland's interests.
Elsewhere, investors, banking experts and policy-makers worldwide tried to fathom Ireland's course of action. Guarantees were not a new idea as a first response to bank crisis. But why had the Irish State tied itself to the fate of its banks – leaving itself liable for an unpredictable avalanche of toxic debts from a property bust?
Undeterred, the Government pushed a blanket two-year guarantee through the Oireachtas at ramming speed.
And as Yeats put it, about a different, perhaps equally epoch-defining event in Irish history, "All changed, changed utterly".
Banksters by David Murphy and Martina Devlin is published by Hachette Books Ireland