Two hundred and eighty words. That is how long the government's blanket guarantee for the State's banks was when it was published at around 6.45am on the morning of Tuesday, September 30th, 2008.
Looking back, 10 years on, that message could be distilled to just five words: “we stand behind our banks.”
No Irish government decision has been more scrutinised, more analysed and, from many quarters, more criticised than that of then taoiseach Brian Cowen, minister for finance Brian Lenihan and their Fianna Fáil-Green Party coalition to guarantee the Irish institutions to halt a run on Anglo Irish Bank.
All told, the government stepped in to cover liabilities of €440 billion at AIB, Bank of Ireland, Anglo, Irish Life & Permanent, EBS and Irish Nationwide Building Society for a period of two years. That covered all the deposits and all but €8 billion of the banks' own borrowings drawn from bondholders and other banks.
The dawn statement released by the Department of Finance on Merrion Street – after a long night of discussions at Government Buildings – was the State telling a global financial system gripped with the worst panic since the Great Depression: don't worry about our banks, you will get your money back.
It was a vast sum of money to insure, amounting to about 10 times of what was then the national debt. It was felt by many of the players involved in the deliberations leading to the decision as “the least worst option”.
"It wasn't about saving the banks; it was about saving the financial system," the government's legal adviser at the time, attorney general Paul Gallagher, told the Oireachtas banking inquiry that later examined the night in detail. The inquiry in 2015 produced the most comprehensive first-hand account of what transpired over those crucial hours.
Deposit levels at Anglo were falling fast too, and the bank was facing the prospect of default and closure the following day.
The night’s deliberations focused exclusively on a liquidity crisis; there was little or no discussion on the what-if scenarios around solvency and the exposure of the banking system to a property crash.
The previous day – Monday, September 29th – Anglo's market value had almost halved, falling by 46 per cent. At a time when the share price had become a proxy for stability just two weeks after the collapse of leading Wall Street institution Lehman Brothers, the markets had effectively written off the State's third largest bank.
Deposit levels at Anglo were falling fast too, and the bank was facing the prospect of default and closure the following day.
One by one
By the end of September, the financial crisis that started in the US had spread across the Atlantic. European banks were dropping one by one: Bradford & Bingley in Britain, Hypo Real Estate in Germany, Glitnir in Iceland and Fortis in Belgium. As Cowen, Lenihan and their advisers weighed an Irish-specific solution to stem the contagion rippling through the international financial system, the US Congress voted down a rescue plan to take out toxic assets from American banks.
Outside government and official circles, the first call of distress came from Anglo itself on the Monday afternoon. Bleeding deposits fast and petrified by the inaction of the Central Bank, Anglo's chairman Sean FitzPatrick and chief executive David Drumm turned to economist Alan Gray, a board member at the Central Bank and an informal adviser to Cowen, calling unannounced at his Dublin office desperately seeking support.
Then they turned to Bank of Ireland with a "plea for help", as the bank's then governor Richard Burrows put it. During a meeting lasting less than a hour, Anglo asked Bank of Ireland to consider taking the bank or any part of it over during a hastily arranged meeting at Bank of Ireland's head office. Bank of Ireland said no.
AIB would not even entertain a meeting with Anglo when FitzPatrick telephoned its chairman Dermot Gleeson.
Bank of Ireland's "oh my God" moment came later when Central Bank governor John Hurley told Burrows at a pre-scheduled meeting that the State's lender of last resort did not have any plan to deal with Anglo's existential crisis, and that Burrows should approach the government if he wanted to take matters further.
Bank of Ireland did. But by the time a request was made jointly with AIB that the banks wanted to see the taoiseach about Anglo’s crisis, it was already battle stations in Government Buildings.
By 5pm, a call went into the Central Bank from Anglo; the bank was facing repayments of €2 billion and had just €1 billion to meet them. They could see the cliff-edge. The bank had already lost €5 billion in the week Lehmans collapsed and several billion euro more in the following week.
Anglo told the Central Bank that unless something happened, the bank would default the next day. The message back from Dame Street was: don’t go home, we will be back to you. Anglo started putting together pools of collateral – assets that could be used to borrow emergency loans from the Central Bank.
At around 6pm, Cowen and Lenihan had all the key players around them, including Hurley, Pat Neary and Jim Farrell from the Financial Regulator, and the attorney general Paul Gallagher, in the meeting room next to the taoiseach's office.
Once it became clear that Anglo’s funding position was critical and that it was facing a dire situation the following day, it was obvious to Cowen that they had to do something significant to stop a banking implosion. The priority, as he saw it, was to get money back into the system, fast.
Preferred route
The idea of the guarantee emerged as the preferred route early on, prompting Kevin Cardiff, second secretary general at the Department of Finance, to email Government adviser Henrietta Baldock of Merrill Lynch at 6.37pm seeking a document prepared for a meeting the previous day, weighing the pros and cons of a guarantee along with other options.
One participant in the meeting recalls thinking it curious that Merrill Lynch was not in Government Buildings on the night given the scale of the decision required.
The taoiseach, very much in charge of the meeting, with his jacket off, wanted to hear the pros and cons of all options from the people around him that night, and particularly why the Central Bank and Financial Regulator wanted the guarantee.
Cowen and Lenihan were described as being “very measured and thoughtful” on the night by a person who was there. “There was no sense of mad panic. There was a process that had to be gone through. The guarantee wasn’t a wild decision but it was, in my view, predicated on the basis that it wouldn’t be called.”
Doing nothing and letting Anglo fail was never considered. It “simply wasn’t an option on the night”, Cowen told the banking inquiry. The bank had a balance sheet of €100 billion, and while the type of banking it did might not have been systemic, the official view was that its sheer size within the overall banking system made it too big to fail.
It would have caused “irreparable damage to the economy as a result of a banking meltdown”, said Cowen, or would, as Hurley put it, “set the country back 25 years”.
Liquidating Anglo was not viewed as a runner on the night either, despite Hurley's successor as Central Bank governor Patrick Honohan saying later that putting Anglo and Irish Nationwide into liquidation while standing behind the rest of the banking system "should have been more favourably considered".
“No official adviser advocated a liquidation of Anglo at that point,” Cardiff told the banking inquiry.
It came down to two options: nationalise the weakest link in the system, Anglo, and the next weakest Irish Nationwide, plus give a guarantee for the remaining four banks, or, alternatively, give a blanket guarantee covering all six domestic banks. That binary choice became the dilemma for Cowen and Lenihan. Both were seriously considered. For Cowen it was critical to find the best decision that would not prejudice other moves.
There may have been about a dozen key players on the night in the taoiseach’s meeting room, and a half dozen more aides around the building, but a key moment occurred during a private meeting between the taoiseach and his minister for finance. Representing the government, they were the only two politicians and decision-makers in the building that night.
Cowen was not ruling out nationalisation in the future, but was concerned that if they partially nationalised the banking system it would have a negative effect on the other banks
The meeting came early in the proceedings, before the chairmen and chief executives of AIB and Bank of Ireland arrived at 9.30pm, when the two men took a break from the main meeting to meet privately in the taoiseach’s office.
Opposing positions
They set out their opposing positions. Lenihan still wanted to nationalise Anglo and guarantee the other banks.
Cowen was not ruling out nationalisation as a potential option in the future, but was concerned that if they partially nationalised the banking system by taking over Anglo it would have a negative run-on effect on the other banks. He argued that nationalising any part of the system could have a contagious effect in the market, creating the belief that if the government nationalised one, it would end up nationalising them all.
He was concerned too about taking on an open-ended commitment to Anglo, having to fund it and taking all the assets and liabilities on to the State’s books immediately. His preference was for a time-limited solution designed to get money back into the system and get through that particular period. That required a simple message.
Hurley’s advice to Cowen – that he had “one go” at a solution – weighed heavily on him. He told Lenihan that it was a judgment call and he wanted the guarantee.
Honohan said that Lenihan told him he argued strongly for the immediate nationalisation of both Anglo and Irish Nationwide but he was “overruled on the night”.
“It wasn’t an atmosphere where I was overruling people,” Cowen countered at the banking inquiry. They were neither adversarial nor confrontational with each other in their conversation, he said. “Both of us were deliberating and striving to find the best course of action for the country at this point in time.”
Lenihan’s death in June 2011 robbed the record of his own direct account of this meeting.
Portable television
Others also believed the nationalisation of Anglo was the better option, including Cardiff and the National Treasury Management Agency, the State's money manager.
Strangely, the agency’s views were not canvassed on the night. Brendan McDonagh, the agency’s director of finance, technology and risk at the time, told the banking inquiry that he was left sitting in an ante-room with a small portable television stuck on a business news channel watching the Dow Jones “tanking by 700 points”.
“That’s my most abiding memory of that night: that we were there and there was a TV on in the corner, and you could see the world was collapsing not just in Ireland.”
By the time the banks joined the night’s proceedings at 9.30pm (although it was in or around midnight before they got an audience with the taoiseach), the guarantee was “already cooked”, said a participant in the meetings. Despite the efforts of the bankers, particularly AIB, stressing the need to nationalise Anglo and Irish Nationwide, the guarantee is what they got.
The banking inquiry never got to the bottom of why Bank of Ireland left Government Buildings in the early hours of Tuesday morning believing a six-bank guarantee had been agreed, while AIB thought it was a four-bank guarantee with Anglo and Irish Nationwide being handled differently.
The answer lies in the €5 billion that AIB and Bank of Ireland each agreed to make available that night to help fund Anglo the following day at the government’s request. AIB’s belief was that if the government wanted the €10 billion for Anglo, why would it guarantee six banks rather than four? A blanket guarantee meant that the €10 billion was not needed.
Most parties recall the night as a hectic time, and understand how others could have reached different conclusions on the plans being considered in the heat of an intense night of deliberations, particularly when AIB and Bank of Ireland were kept in separate offices when not meeting government.
“It is a bit like a car crash; different people see different things,” said one of the participants.
Brief respite
In the end the guarantee only provided a brief respite from crisis. It worked in the short-term, bringing money back into the system, but rapidly declining property values over subsequent months revealed deep problems with the balance sheets of the banks generally, while the greater scrutiny of Anglo unearthed shady banking practices, since ruled to be criminal.
Over the two-year duration of the guarantee, heavy losses – mostly on commercial property loans – ultimately forced the government to pump €64 billion of public money into the banks, nationalising the bulk of the system. It also set up Nama in 2009 to take €72 billion of face-value toxic property loans off the balance sheets of the lenders.
The net cost of the crisis will be much lower, given the residual value of the State’s shareholding in the banks (it still owns 14 per cent of Bank of Ireland, 71 per cent of AIB, and 75 per cent of Permanent TSB) and what it has already received from them. Ultimately, the cost of the bailouts to the State is likely to be about €32 billion, give or take a billion or two. That sum relates to the failures of Anglo and Irish Nationwide.
It works out at about €115 million for each one of those 280 words in the guarantee.