Maeve Dineen: Guarantee made in panic needs to end without fuss
THREE years ago today, we woke up to the news that Brian Lenihan had guaranteed the entire Irish banking system.
It was a breathtaking late-night gamble that stunned most of us and the rest of Europe. In the days following the guarantee, money flowed into the Irish banking system from abroad as people everywhere tried to protect their money from the aftermath of the Lehman collapse.
A week later, the money began to leave again (and it hasn't stopped since) as savers cottoned on to the fact that the Irish Government would simply be unable to cover over €400bn of possible bank debt, including deposits, no matter what the Government was saying.
The bank guarantee is undoubtedly the most controversial financial decision ever made by an Irish government and has been described as the "costliest mistake" ever made by an Irishman.
In retrospect, the most extraordinary aspect of the entire decision is that it was made in the space of a few hours and without any sitting of the cabinet. Even at the height of World War Two, Churchill usually managed to get the approval of his cabinet and a secret meeting of parliament before throwing the dice. Our boys did it alone, in a blind panic that the banks would not be able to open on Monday, but crucially on the back of some very dodgy information from our bankers.
Some countries followed our example, guaranteeing this bank or those deposits, but no government anywhere tried to replicate the Irish model; Ireland's experience taught the world that a really broad guarantee lacks credibility and carries significant dangers.
"I knew full well that if the Irish Government's bluff was called they would be bankrupt. It was a promise on which they could never deliver," the then British finance minister Alistair Darling wrote in his memoirs published earlier this month. And the sad thing is that he was right. The guarantee forced the Government's hand subsequently and contributed to the IMF/EU bailout two years later.
For such a momentous and fateful decision, surprisingly little is known about how it came to be made.
The last Government has taken great care to cover its tracks, and the new Government has done little or nothing to uncover them.
We still don't know who was in the room and what was said. We can assume that former AlB chief executive Eugene Sheehy and his Bank of Ireland counterpart Brian Goggin begged Lenihan and Brian Cowen to guarantee the entire system, but we cannot be sure.
We can only assume that most of the civil servants and regulators who were there concurred, but we cannot be sure. In fact one very senior civil servant who was in attendance on that fateful night has told me he opposed the blanket guarantee. So what was the advice that led Lenihan to boast so inaccurately that it would be the "cheapest bailout in history"?
Central Bank Governor Patrick Honohan has since claimed, in his investigation into the crisis, that the guarantee made sense.
His conclusion is couched with one or two caveats about certain kinds of debt -- and our failure to inform our European partners -- but the governor basically endorses the decision.
One can see why. It is easy to gloss over the appalling consequences if AIB and Bank of Ireland had gone down. Whether Anglo Irish and Irish Nationwide should also have been saved remains a moot point, although the small savers who made up the bulk of Nationwide depositors would have to be protected.
A decision to shut down Anglo (which is to be wound down now anyway) would have been chaotic and would probably have involved the immediate nationalisation of AIB, BoI and the EBS but this has more or less happened anyway. The truth is that we just don't know.
It is fashionable to call for an inquiry at this point but everyone is fed up with inquiries by now. We have learnt very little from the previous reports and it is impossible to make definitive conclusions about what might have been.
WITHOUT solid information about what knowledge was available to the Government, it seems pointless to pick at the scab that is slowly growing over the guarantee, but there are lessons to be learnt.
The first lesson is that our political leaders were not paying attention in the lead-up to the crisis. Cowen and Lenihan's narrative initially suggested that they were hi-jacked by the bankers who strolled into Merrion Street one evening and announced the entire system was about to collapse.
The reality, as Cowen's still unexplained game of golf with Sean FitzPatrick shows, was far more complex. Red lights were flashing for several months. FitzPatrick was trying all sorts of things to save his ridiculous bank and this should have sparked action much earlier.
Another lesson is that decisions as important as the guarantee should not be made in a blind panic. Cowen and Lenihan should have had the courage to suspend trading on the stock exchange for a day or two and take measures to prevent a run on the banks. The markets are impatient but they are not so impatient that they do not offer a few days' grace. In fact, they rarely respect panic.
The third lesson is that banking has become much too complex. Britain has introduced controversial proposals to separate the casino elements of the banks from the ordinary high street elements.
Irish banks are more involved on the high street but, appallingly, they have neglected their core business and now lack the expertise to support ordinary customers.
There is also a continuing risk from the fact that big international institutions are headquartered in Ireland and therefore regulated from here. While this is highly beneficial to the economy, it poses huge risks. Banking is not a business like any other. It is always guaranteed by the State, either explicitly or implicitly.
The public has a right to say to bankers that anything we guarantee cannot take on too much risk. We are not a nation of bankers like the British or the Swiss. While it is rarely profitable to look back, it is often worthwhile to look forward. Three years after the guarantee, it is time for a date to end it.