Why did almost no one realise that Anglo Irish was not just illiquid but insolvent?

Government pledged €440bn without knowing the nature of the banks’ crisis

Finance minister Brian Lenihan: Was there not an onus on him and Brian Cowen to assure themselves as regards the gamble they were taking that the problem with the banks was not a solvency one? Photograph: Brenda Fitzsimons Finance minister Brian Lenihan: Was there not an onus on him and Brian Cowen to assure themselves as regards the gamble they were taking that the problem with the banks was not a solvency one? Photograph: Brenda Fitzsimons

First published: Wed, Jun 26, 2013, 12:00

   

There is understandable fury over the giddy amusement of Anglo Irish Bank executives on the concealment from the financial regulator that the bank would need in excess of €7 billion to rescue it. But the real horror of the revelations is that these executives knew by September 18th, 2008, 12 days before the bank guarantee, that the bank was insolvent, and that the problem was not liquidity.


What is staggering is that nobody outside the bank appears to have known this and nobody bothered to establish whether this was so or not. Was it not the job of the financial regulator to know these things and if it was not, what was the point of the financial regulator? None of the battery of all-knowing economists perceived the banks were insolvent, not just illiquid. Except Morgan Kelly.

It is baffling that nobody linked the much talked-about imminence of a property crash to the solvency of the banks. For instance, David McWilliams, the economic commentator, who for years had been prophesying the collapse of what he regarded as the “property bubble”, was the one urging the government and the minister for finance Brian Lenihan personally to give a blanket bank guarantee. David McWilliams must not have believed himself!

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But, most shockingly, the government of the day, supported by much of the opposition, pledged, on behalf of the Irish people, to guarantee the banks to the extent of €440 billion, without knowing whether the banks had a liquidity crisis or a solvency crisis. And what was even more outrageous is that executives in Anglo Irish Bank appreciated that the bank was insolvent and said nothing, while the Irish people were put on the line for its huge losses – if that is so!
Massive gamble
But wasn’t there an obligation on the part of the government, notably on the part of Brian Cowen and Brian Lenihan, who were the ones who took the decision on the guarantee, to assure themselves that the massive gamble they were taking with the funds of the Irish people, that the problem with the bank wasn’t a solvency problem? And wasn’t there an obligation on the part of the bulk of the opposition to seek such an assurance before giving their support to the guarantee?

Remember the governing statement issued on the morning of the bank guarantee, September 30th, 2008, saying it was putting in place, “with immediate effect a guarantee to safeguard all deposits (retail, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II) with (six institutions, including Anglo Irish Bank)”? It said this was being done “to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets”.