An Orgy of Retrospection on the Bank Guarantee

I still think that Cowen and Lenihan were incorrect to blanket guarantee
the banks. I still think that the Irish Nationwide and Anglo Irish Bank
should have been let go in an orderly fashion. Moral hazard has to operate
in capitalism. The only question for me wsa how to achieve the above.
Professor Honohan is not a sage.I remain unconvinced about his conclusions
about Anglo and the issue of systemic importance. Lenihan is correct about
Fine Gael. His conclusion is that FG is wrong. My contrary opinion is that
FG was and is right. However such verbal tennis is academic only as the
government mess is now locked in at the budget deficit/GDP ratio of 19.75%
for this year due to bank spending. The €22 billion loss at Anglo and the
€2 billion at Nationwide is wrong. Draw your own conclusions on this issue.
Look at the facts. Some are listed below.

By SIMON CARSWELL, COLM KEENA and DEAGLÁN de BRÉADÚN, www.irishtimes.com,
Updated: 17/07/2010
Consultants’ advice raised fears over bank scheme

Irish Times Latest News

The final piece of written advice given to the Government by outside
consultants Merrill Lynch in the run-up to the bank guarantee recommended a
€20 billion emergency lending fund and highlighted serious concerns about a
blanket guarantee.

Minister for Finance Brian Lenihan said the 54 documents, published by the
Dáil Committee of Public Accounts, supported the Government’s decision to
introduce the guarantee in September 2008.

However, Fine Gael’s finance spokesman Michael Noonan said the documents
showed that Merrill Lynch were against a blanket guarantee and told Mr
Lenihan this days before the guarantee was chosen.

Merrill Lynch was hired by the Department of Finance on Wednesday,
September 24th, 2008, and they produced an advisory memo for Government
four days later, on Sunday, September 28th.

This was the last of a series of documents released by the Government
covering the days running up to the introduction of the guarantee on the
night of September 29th.

It warned about the potential downsides of a blanket guarantee and leaned
towards a combination of alternative measures, including the €20 billion
emergency loan scheme.

While a guarantee would stem the outflows of deposits from the banks, the
scale of the guarantee could be in excess of €500 billion, the advisers
warned. The Government ended up covering liabilities of €440 billion.

The guarantee “would almost certainly negatively impact the State’s
sovereign credit rating and raise issues as to its credibility”.

“The wider market will be aware that Ireland could not afford to cover the
full amount if required,” Merrill Lynch said in the memo.

The same document, which reviewed other options for the State, said there
was “no right or wrong answer” to the crisis the Government was facing. The
only option Merrill Lynch definitively ruled out was allowing a bank to
fail.

At a meeting on Friday, September 26th, 2008, Mr Lenihan was told by
Merrill Lynch that a blanket guarantee “could be a mistake” that would
allow “poorer banks” to continue in business.

Mr Lenihan last night pointed out that a document produced that same day by
Merrill Lynch, which reviewed the options available, described a blanket
guarantee as the “best/most decisive/most impactful from market
perspective”.

“In the context of rapidly deteriorating circumstances on the night of the
September 29th,” the Government decided in favour of this particular
option, Mr Lenihan said.

“It is wrong to suggest that Merrill Lynch recommended one option over
another. Indeed, the only option which Merrill Lynch discounted, after full
consideration, was the option of allowing an Irish bank to fail. This is
the option that Fine Gael has advanced since 2009,” Mr Lenihan said.

Alternative options suggested by the advisers, such as limiting the
guarantee to Anglo Irish Bank and Irish Nationwide while taking those
institutions into State control, also contained enormous potential negative
outcomes, the advisers said.

The Taoiseach said there were a number of options set out by Merrill Lynch.
He said the recent report by the Central Bank governor, Patrick Honohan,
“confirmed the blanket guarantee was the way forward”.

Mr Noonan said the documents showed the department’s then secretary general
David Doyle warned that the banking system potentially faced not just a
liquidity but also a solvency crisis.

“The very next day Merrill Lynch’s top advisers, hired by the Government at
great expense to advise on the crisis, recommended against a blanket
guarantee at a meeting attended by the Finance Minister,” Mr Noonan said.

The Government paid Merrill Lynch €7.3 million for its advice from
September 2008 to June 2009.