The establishment of the Domestic Standing Group (DSG) in July 2007 by a Memorandum of Understanding between the Central Bank, the Financial Regulator and the Department of Finance was an EU requirement. Following a recommendation of the Economic and Financial Committee1 , the EU Financial Services Committee had required that all member states establish an emergency planning and management group in the form of a Domestic Standing Group.2 Membership of the DSG was also effectively prescribed by the EU. The 2005 EU Memorandum of Understanding brought the principals from the Central Banks, Bank Supervisors and the Ministries for Finance together as a tripartite group to formulate an EU wide policy on crisis management.3 This was followed by a domestic Memorandum of Understanding in 2007 which formed the Domestic Standing Group (DSG). The signatories to this Memorandum of Understanding were Kevin Cardiff, Second Secretary of the Department of Finance, Liam Barron, Director General (CBFSAI) and Patrick Neary (Financial Regulator).4
The primary representatives of each party comprising the DSG were Tom O’Connell (CBFSAI), Con Horan (Financial Regulator), and William Beausang (Department of Finance).5
The DSG met on a monthly basis from July 2007 – July 2008 and supplied much of the financial market information from the Central Bank and the Regulator to the Minister and Government during the period covered in this chapter.
For some time the National Treasury Management Agency (NTMA) had been sceptical of the business models of INBS and Anglo. Michael Somers, who was CEO of the NTMA said:“I always had a concern about Anglo…”6 Somers subsequently added in his clarification statement to the Joint Committee7 that the Minister for Finance’s guidelines prohibited the NTMA from placing deposits in counterparties with S&P8 rating of less that A1, which included INBS.”9
The NTMA’s former Director of Finance and Risk, Brendan McDonagh, explained to the Inquiry how the agency was now growing increasingly concerned about the global financial markets:
“By August 2007, the NTMA had made the decision… to stop placing deposits with any bank. The NTMA policy was to move maturing deposits back to the Central Bank of Ireland – we referred to it internally as safe-harbouring deposits.”10
He also said:
“we had concerns from August 2007 about banks globally, Deputy, because things ... strange things were beginning to happen. There was rumour after rumour in the market even about big banks like Wachovia, Wells Fargo, Washington Mutual, Citibank, BNP Paribas, Goldman Sachs ... Merrill Lynch … so like, it wasn’t just confined to Ireland.”11
John Corrigan, Chief Executive Officer NTMA, put this in the context of the NTMA’s role:
“the NTMA’s role is ... in that space is to fund the Exchequer and to make sure that the Exchequer has sufficient cash to meet its day-to-day requirements. We had a very conservative approach to risk. I don’t think anybody would thank us if the money which had been garnered through borrowing or through tax receipts had been lost through some sort of placement with, with, dodgy counterparts.”12
When asked by the Joint Committee“Was it the first time that the NTMA had made that kind of decision in relation to putting deposit in the Irish banks?”13 , John Corrigan responded:“To the best of my knowledge, yes.”14
Brendan McDonagh stated:
“There could have been no ambiguity at any time during this period on the part of senior Department of Finance officials or the Minister for Finance as to the NTMA’s position on global bank risk from August 2007 and our reluctance, given the increasing dislocation of financial markets, to put at risk any State money under our management by placing it on deposit with domestic or international financial institutions unless we were directed to do so by the Minister for Finance.”15
Despite the fact that the NTMA,“who had a strong market-facing role, had very fundamental concerns about the stability of the financial system”16 the Central Bank and Financial Regulator reported to the DSG that the“domestic economy and banking system remained sound and there is no cause for alarm.”17 They told the group that they were not aware of any liquidity difficulties for Irish banks.18 “However if there is a long term credit crunch globally this could impact on economic developments.”19 For now,“This is not an Irish problem, but a global one. The Regulator has put a lot of effort into minimising any reputational damage for Ireland, but there are risks there also.”
The September IMF Article IV Staff Report was largely positive about the fundamentals of the Irish economy, though it noted weaknesses both in the construction sector and the exposure to the banks. It said:
“Economic performance remains impressive but noted that in recent years economic growth had become increasingly reliant on house building. It also noted that banks have large exposures to the property market, but stress tests suggest that cushions are adequate to cover a range of shocks.”20
The Irish Times carried an article on 7 September 2007 entitled ‘Banking on Very Shaky Foundations’ written by Professor Morgan Kelly.21
Northern Rock, a UK bank, sought and received liquidity support from the Bank of England due to a problem in the credit market. This led to panic among depositors“in the first run on a British bank in more than a century.”22 In Ireland“there were queues on the street outside Northern Rock when it got into difficulty.”23
Less than a fortnight later, the Central Bank was reporting to the DSG that the Northern Rock crisis was still generating a significant negative effect on the market, but that there were tentative improvements.24 However, some“significant Irish financial institutions” needed to renew substantial funding in early 2008. Access to ECB funding was regarded as a very important safeguard for Irish banks.25
On 2 October 2007 a preparatory note for the DSG meeting raised several issues that needed attention.26 According to the note, the Department was starting to consider what legal powers might be needed by the Minister for Finance to provide assistance to a financial institution in distress. Included in these options was nationalisation.27 The legal position regarding“the scope for the NTMA to place a deposit with a bank” was also highlighted for examination. So too was the Deposit Guarantee Scheme, which protects depositors, following the UK government’s decision to provide a temporary 100% guarantee of deposits with Northern Rock.
It is worth pointing out that three months after the DSG was formed and a month after Northern Rock, there was still a sense that the“roles and responsibilities of the Department, the Central Bank, and the Financial Regulator” needed clarification.28
In its October update to the DSG the CBFSAI reported that Irish banks had a“good name” although it noted that there was also a perception internationally that Irish banks were exposed to the property sector.29 They reported a“…return to more normal financial markets conditions…”30 But even with improved liquidity conditions, a tightening of lending behaviour was prevalent and the retail lending rates would remain under upward pressure“for as long as disturbed credit market conditions persist.”31 The report also noted that while market funding was available, it was increasingly over a shorter term. Irish bank shares continued to fall, having lost between 30% and 40% of their value since the start of 2007. This update also marked the first time in the period that the issue of Contracts for Difference (CFDs) was brought to the attention of the Department. Significant losses to high‘net worth’ individuals in relation to CFDs were highlighted.32
The pressures were building, as evidenced by an email from IL&P to the Regulator on the 13 November confirming the raising of €2 billion from the ECB but noting:“The level of pressure on Irish Institutions continues at a pace in both the Credit and Equity Markets.” The email also passed on some feedback IL&P had received from their major shareholders:“…One of our Canadian Holders said that she had been informed out of London that we in IL&P are the next Northern Rock, so once again, we are on red alert.”33
An information note, known as an ‘Aide Memoire’ for Government, was sent to Brian Cowen, former Minister for Finance, on 13 November 2007. The subject of this information note was ‘Financial Market Developments’. It summarised the information given by the DSG to the Central Bank and Regulator and it also provided a look ahead to the Central Bank’s Financial Stability Report.34
The DSG update repeated concerns on the Irish economy and the exposure of banks to the property sector with bank share prices reported as being“depressed.”35 It also claimed that despite improvements in credit market conditions, the financial markets remained volatile. However it noted that:“To date, these developments have not had any serious effects on the Irish domestic financial system…And stressed that the “Irish institutions are financially sound with good quality assets and are well regulated.”36
The update also included an overall assessment of the 2007 Financial Stability Report. It said that financial stability risks had increased on previous years, but that the upward momentum of residential property prices had slowed and house prices had lowered by 3.5% on a year to date basis. The assessment concluded that:“The underlying fundamentals of the residential market continue to appear strong. The central scenario is, therefore, for a soft, rather than a hard, landing.”37
The Central Bank produced a paper for another DSG meeting in November. In the month that had passed since the last update, Irish bank share prices had continued to fall and had now lost between 30% and 50% of their value. According to the report the quality of assets secured on speculative development land was a particular focus of attention for financial institutions.
The update also provided more detail on negative sentiment on the interbank market toward Irish banks’ exposure to the property markets:
“There are some indications that lrish banks are being subject to more refusals in the unsecured interbank market on account of negative international sentiment regarding the lrish banking sector and the Irish property market generally… there is a general discount in the value of lrish banks as there is a perception internationally that they are exposed to the property markets…”38
Two items were highlighted in the update. One was that“If the present market conditions persist, as expected, into 2008 there is an increased risk of liquidity issues arising for Irish banks”. The other was the importance of“highlighting the inherent strengths of the Irish financial system and economy.”39
The Central Bank and Financial Regulator reported to the DSG that they were continuing to monitor the position closely:
“The Central Bank and Financial Regulator continue to liaise with the Irish banks closely at CEO level and are monitoring the position very closely. The banks in turn are working intensively to implement contingency arrangements to meet their liquidity requirements.”40
Meanwhile, work was continuing to prepare legislation to provide the Minister for Finance with the necessary legal options to support a distressed financial institution, including nationalisation. This was confirmed by former Attorney General Paul Gallagher in his evidence:
“Between 30 November 2007 and 29 September 2008, the Department was in constant contact with my office, looking at possibilities, identifying different options.”41
However bank resolution legislation, which would allow for the winding up of a financial institution and which would have given another legislative option on the night of the Guarantee, had not been requested from the Attorney General or the Office of the Attorney General.
Since the NTMA’s decision to move its deposits away from the domestic banks, it had come under pressure to reverse that decision. Michael Somers said:
“the pressure then continued on us at every meeting we went to …we were only asked along because I think we had the money and they wanted us to part with …”
“We had a meeting of the NTMA advisory committee, I think it was about 6 December, when the pressure was extreme. And I went off and I said I’d have to get legal advice on this as to where do I stand. Because, I mean, the Minister for Finance was my boss and I wanted to see, well, what do I do? Because the legal power that we were using was to borrow money for the Exchequer. It wasn’t to borrow money to bail out the banks … We were borrowing money to fund the Exchequer. Here we were being pushed to use that money, which was there to pay the bills at the end of the week, to instead prop up the banks, to provide liquidity for the banks.”42
Michael Somers then sought a legal opinion as to how to proceed and Brendan McDonagh explained that:
“and the senior counsel’s opinion came back, said, ‘Legislation’s very clear under the 1990 Act. If the Minister issues you a direction under section 4(4), you are obliged to comply with the Minister’s direction.’”43
Brendan McDonagh explained in his evidence that the NTMA was invited to attend a DSG meeting on 12 December 2007. He said:
“The NTMA was invited to the latter stages of a domestic standing group meeting with the Department of Finance and the Central Bank to discuss the placing of deposits within existing credit limits with; Bank of Ireland, €200 million; AIB, €200 million; Irish Life and Permanent, €50 million; and EBS, €50 million. An existing deposit of €40 million with Anglo Irish Bank, with a maturity of one year, had been in place before the NTMA made its decision to cease placing the deposits with the banks and to place them instead with the Central Bank. The NTMA’s position at this meeting which took place I believe on 12 December 2007, was that in the absence of a written direction from the Minister, we did not intend reversing this policy of placing bank deposits in financial institutions. We made the point at the meeting that, if anything, the risks attaching to the banking system, internationally as well as domestically, had become even more pronounced since the original August 2007 decision.”44
“Following that meeting, the Minister for Finance at the time, Brian Cowen, wrote to the chief executive of the NTMA, Michael Somers, on 19 December 2007, directing the NTMA to place deposits with the four main banks, namely, Bank of Ireland, AIB, Irish Life and Permanent and EBS.”45
The position adopted by Brian Cowen was contrary to the position of the NTMA.
This direction was clarified to the NTMA on 21 December 2007.46 Brian Cowen said in evidence:
“the NTMA chief executive, who ... they’re very strong on their independence, they wanted a written letter that they were to continue providing funds into the Anglo Irish Bank. In terms of deposits, overnight deposits, it was felt that, if it were to emerge that they weren’t doing that, that that might reflect badly on the banking system generally. So that direction was written for by me in January of 2008 for a six-month period.”47
He also said:
“There was a letter of instruction, as I understand, because they said they required a direction on that and they were always very mindful of their own independence.”48
The EU requirement49 to run a crisis simulation exercise was met in December 2007. It was the first of its type to include members of the DSG, and it was run over the course of an afternoon. The simulation focused on a distressed single borrower.50 Feedback sought by the Central Bank from the exercise was largely positive; it was well planned organised and effectively executed.51 Though the procedures in the crisis management manual used by the Central Bank known as the‘Black Book’, were described in the Honohan Report as “…excessively cumbersome…”,52 evidence to the Joint Committee from Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, was that the exercise was well formulated:
“…really well constructed in the sense of a lot of thought went into it over a period of weeks or months by the people concerned and there was a real attempt to make this a realistic thing that could happen…”53
As to whether or not this was a“realistic thing that could happen,” Con Horan, former Prudential Director of the Financial Regulator, said:
“Being absolutely frank, I’ve been involved in these at a European level and I’ve been involved in them at a domestic level. And they are largely simulations around a small group of facts that are conducted over an afternoon or a full day with papers prepared and people able to read documents in advance of that. So, the reality is they do ... you do learn lessons and you do pick up issues in relation to how it would happen in reality, but, in effect, having experienced crises in Ireland and in Europe in recent years, the reality is always an awful lot more complicated and different.”54
At the end of 2007 and into the start of 2008 the “big four”55 auditing firms were becoming increasingly concerned about the stability of the banking sector and the consequences for their clients as going concerns. The four firms met with the Financial Regulator in early 2008. The purpose was to ensure a full understanding among the authorities of the risks now evident in the financial system, and to seek reassurance of the actions being taken by the Government, Regulator and Central Bank to address these risks.56
Paul Dobey, of KPMG, the auditor for AIB, said:
“We were concerned, generally, as a firm, in relation to the matters ... the financial stability matters in 2007, and in early ... on 10 January 2008 we met with the Financial Regulator… to have a discussion about the issues that the ... the issues that were arising in the environment at the time.”57
“all the four firms went in and ... and talked to the ... to the regulator.”58
In relation to further meetings held in late 2008 and early 2009, he said:
“and it wasn’t done lightly. We had huge consultations in our firm… It was unprecedented”59
“We spoke to the Central Bank because we wanted to understand ELA and... what dialogue was going on between the Central Bank and the euro system… and we also spoke to the Department in relation to capital. Now, when we came along ... and we, therefore, concluded that those banks were going concerns.”60
“…we also had a responsibility to assess whether the going concern based on preparation of financial statements was appropriate. It was in the context of the going concern based on the financial statements which was a future looking thing and maybe that’s not keeping the score, right? That’s assessing what the score might be at the end of the game, right? And we’re only at half-time. We had to go and make an assessment and get assurances from the system, if I put it that way, the Department, the Regulator, the Central Bank, around the going concern basis of preparation.”61
John McDonnell, Partner of PwC described the meeting in the following terms:
“the meeting that the accounting firms had with the regulator in the context of accounting for financial instruments as a result of the liquidity crisis. And what happened at the time was that we had the subprime crisis in late 2007 and, as a result of that, there was a number of issues around how one would value securitisation vehicles, but, in particular, the credit aspect of financial ... of financial instruments.”62
A further ‘Memorandum for the Information of Government’ was submitted to Brian Cowen.63 As with the previous updates for Government, the memorandum was based on an assessment by the Central Bank and Financial Regulator presented to the DSG on 11 January 2008. It noted that a massive coordinated intervention by major central banks had provided liquidity for banks to meet their year-end financial needs. However markets were expected to remain disrupted for some time with reports of financial institutions estimating eventual losses ranging from €100 billion to €275 billion and major international banks seeking balance sheet investment from Middle Eastern and Asian investors. The memorandum also noted that the macroeconomic climate was a concern due to poor economic growth globally and the risk of a US recession.
The Memorandum also noted that some improvements in the market had allowed Irish banks to access their required liquidity but the maturity of funding continued to shorten, thereby increasing the pressure over time. There was an improvement in Ireland’s rating by Fitch, however negative sentiment remained, given concerns regarding the property market, and the share prices of Irish banks continued to fall.64
Meanwhile, the DSG was reviewing its financial stability planning. Apart from the crisis simulation exercise, a review of the existing Deposit Guarantee Scheme was still being considered in light of the Northern Rock event. The memorandum also noted that the DSG was continuing to examine the powers available to the CBFSAI and the Minister to respond to a Northern Rock style event in Ireland.65
The assessment in the Memorandum for the Information of the Government concluded:
“It is important to emphasis that the Irish banking system is strong, liquid and well capitalised. Notwithstanding the current turbulence, the Irish banks are accessing their required liquidity…”66
There was also a note that the next two big hurdles were the rollover of long-term funding arrangements early in the year and the publication of audited accounts. Highlighted for particular attention were“fears in the market that a recession in the US could have a significant impact on financial markets globally.” The memorandum concluded that the Financial Regulator and the DSG were monitoring the situation closely.
In January the Department of Finance drafted a confidential 22 page document titled“Financial Stability Issues – Scoping paper”67 . The Scoping Paper sought to identify:
“…the options available to the Irish Authorities in the case of a systemic threat to financial stability, as well as consider any issues regarding the structures currently in place to oversee financial stability planning arrangements and also to manage a financial crisis”68
William Beausang, former Assistant Secretary Department of Finance, was the originator of the project and he described it as an attempt to:“try to develop an approach where there would be more up-to-date or more relevant information available to the authorities at the point that intervention might need to be taken.”69
The paper was drafted as a manual for the management of a financial crisis and detailed the roles of the Central Bank and the Minister for Finance in such a situation. It also effectively summarised the DSG discussions from the previous four months on the legal options available to the Minister, the Central Bank and the Regulator in managing a financial crisis.
Contained within the paper are brief discussions on several key aspects of Financial Regulation. Ideas such as:
Patrick Neary, former Chief Executive IFSRA, said:
“at some stage in 2007, a scoping paper was prepared by the Department of Finance […] and it covered a range of topics, including having a look at a deposit protection scheme, legislation for nationalisation, etc., the tools that might be needed in the event that there was a crisis.”73
Among the tools covered in the Scoping Paper was the use of a government guarantee of a troubled institution’s liabilities to enable it to continue to avail of ELA. The option of nationalisation was also outlined as a temporary measure. Another option was to create a “bad bank”, in other words a State takeover of the part of the bank that it is in difficulty. The paper noted that in a case where a distressed institution is regarded as being systemically important to the economy (i.e. Too Big To Fail) state intervention should be taken on a case by case basis.74 It also noted that:“The costs of insolvency should not transfer to the State simply because the institution in question is a bank.”75
Under the heading“Scenario 1 – An institution that is illiquid but solvent” the paper said:“Therefore the Minister and Government could quickly find itself in a situation where there was pressure to give assurances that the State was prepared to support the bank in difficulty or provide guarantees to its depositors. Other guarantees which the Minister might consider giving included guarantee to banks regarding interbank lending to pre-empt overall withdrawal of market liquidity….”76
In their input into the Scoping Paper the Central Bank and Financial Regulator said that a reference to nationalisation should be included as an additional tool in crisis management. They also said that the issuing of guarantees appeared understated and needed sharper focus, that a letter of comfort (a written assurance as opposed to a full guarantee) from the Minister would not be sufficient to cover the risk to the CBFSAI and that Central Bank could not act on a promise of a guarantee as it was prohibited from lending to insolvent institutions.77 This last aspect was confirmed by Tony Grimes who said:“Well, it’s absolutely clear that if the institution is insolvent the Central Bank could not lend without a formal guarantee of the Government.”78
John Hurley, former Governor, Central Bank, said:“I think there was an adjustment made which was “Look, a broad guarantee might have to be considered in this systemic situation.”79
The input from the Central Bank and Financial Regulator also stated that it was likely to be very difficult to determine the solvency position of an institution. The response paper discussed the scenario in which it was unclear if an institution was insolvent or illiquid. It concluded that the risk involved in refusing to lend to a solvent institution was potentially much more serious than lending to an insolvent one as it may drive a sound bank into liquidation and insolvency.80 This input was reflected in the Scoping Paper.
However, despite this level of input, work on the paper did not progress. The paper itself, as seen by the Committee, is an unfinished draft. In his opening statement, William Beausang said work never progressed because of:“…important differences in emphasis with the Central Bank’s assessment, as reflected in the Central Bank’s comments on the Department’s scoping paper, and its own paper on resolution options circulated in June 2008.”81
The paper was presented to the DSG for observations in January 2008, but saw limited attention outside of that. William Beausang subsequently provided a written statement which stated that:
“Key elements of the Department’s assessment and conclusions set out in the Scoping Paper were not shared by the CBFSAI. Consequently, no agreement was reached at the DSG on the Scoping Paper and it was not submitted to the Minister nor the Secretary-General of the Department of Finance….My recollection is that the work would have been advised to the Head of Banking Division.”
When asked if he had seen a copy of the Scoping Paper, Brian Cowen said:“Mr. Cardiff would have been the guy, my point man, on that.”82
Brian Cowen was asked if he had seen the Paper before. He said he had.83 When then asked when he first saw the Scoping Paper, Brian Cowen said:“When did I see it first? It was only around the time it was done up, I presume.”84
Kevin Cardiff was asked why, given the concerns laid out in the Scoping Paper, nobody went in to examine the banks more closely. He replied:
“…this was a failure. There, there ought to have been better information… And, we believed … were led to believe that the regulator had a good picture of the banks under its remit, that reasonable loan loss stress testing had been done, that the banks were regarded as solvent, resilient, capable of withstanding significant shocks and we accepted that.”85
As well as a CBFSAI assessment of financial markets; items for discussion at the February meeting of the Domestic Standing Group included a review of the Deposit Guarantee Scheme, noting that it was coming up in Parliamentary Questions and it was“important that we are in a position to, at a minimum, state that the issues raised are being examined.”86
The CBFSAI assessment87 started by stating that the Irish banks were still able to access the liquidity they required. However negative sentiment towards Irish banks by international investment banks had resulted in Irish bank share prices remaining low. The assessment noted that there had been some stress testing of residential mortgages in the residential sector but no major issues were highlighted.
When it came to commercial property, the Central Bank was more concerned. The worry was that problems in the sector in the US and the UK were likely to have an impact in Ireland“where difficulties in the commercial property sector are likely to arise during this year.”88 Specifically, defaults in the commercial property sector may arise in loans with moratorium89 or bullet repayments,90 where no payments are made until developments are completed. If the value of the completed development turned out at less than the required repayment, it would lead to defaults. But the report noted that the current position was relatively strong, with low vacancy rates that should help reduce the impact of future problems. The CBFSAI concluded that section of the update by saying:
“The Irish banks are generally happy with the “big players” in property developments. There are some concerns about the next tier of developers e.g. small builders who have completed a development and cannot sell it – and the banks are watching these types of customers early.”91
In February 2008 the Department of Finance also prepared a presentation entitled“Overview of Financial Stability Resolutions Issues” drawn in part from the Scoping Paper and in the midst of that presentation the following text was highlighted:
“As a matter of public policy to protect the interests of taxpayers any requirement to provide open-ended/legally binding State guarantees which would expose the Exchequer to the risk of very significant costs are not regarded as part of the toolkit for successful crisis management and resolution.”92
When asked how it came about that a legally binding State guarantee could not be part of the tool kit in February and yet one could be introduced September, John Hurley said:
“this situation changed absolutely dramatically within a short space of time and the options for the Government were quite limited and in the circumstances of the change.”93
David Doyle, former Secretary General in the Department of Finance, said:
“In relation to that particular statement that you have there in that presentation - that State guarantees are not part of the toolkit - that was the view, that State guarantees should not be part of the toolkit … Now, by the time September arrived, you had the international financial meltdown taking place; you had Bradford and Bingley being nationalised; you had German banks being nationalised; you had Lehman’s being let go to the wall; so towards the end of that month, the view down in Dame Street was that the financial markets had become so crisis bound that, as a last resort, a guarantee would have to be considered. That was the view that started to emerge the week before this down in Dame Street, because of the huge flows of liquidity and what was going on internationally, that it would have to be considered.”94
The Domestic Standing Group received an update on financial market conditions in advance of a Government meeting on 11 March 2008. The four key points of this CBFSAI update were:
The conclusion to the report was that conditions at that time were returning to those experienced at the end of 2007 - the worst point of the turmoil thus far. The key issue at that point was the“increasing realisation that markets are not going to improve soon and may even deteriorate further.”96
On St. Patrick’s Day Anglo shares lost 15% of their value from the previous day close, with a maximum fall of 22% at one point that morning. That same day, AIB closed 6.1% down, IL&P closed 4.7% down and BOI closed 4.7% down.97 A number of other factors unique to the Anglo share decline were identified by the Financial Regulator in its paper investigating trading in Anglo shares dated October 2008.98
Simon Carswell, Irish Times journalist said:
“…after what is known as the St. Patrick’s Day massacre in 2008, when there was short-selling in two of the Irish banks in particular, but mostly in Anglo Irish Bank, a strong statement of confidence issued from the Central Bank and the Financial Regulator’s office to counter that negative market comment.”99
Fintan Drury, Non-Executive Director, Anglo Irish Bank, said:
“a few days after St. Patrick’s Day 2008. I received a phone call from Seán Fitzpatrick, the chairman of the bank, asking me if he thought that Brian Cowen would take a call from him.”100
Seán Fitzpatrick phoned Brian Cowen who was in Vietnam on Ministerial (St. Patrick’s Day) business. Brian Cowen explained:
“The purpose of his phone call was to say to me that they ... that this had happened in relation to the share price and that they believed that there was a position being taken by Mr. Quinn in relation to their share and that’s ... that the market had this information was out in the markets or whatever. And I said that these are regulatory matters, these are matters he needed to refer down to the Central Bank and to the Financial Regulator and have it dealt with there.”101
Shortly after his return to Ireland, Brian Cowen had a meeting with Bertie Ahern at his home. Bertie Ahern said:
“Obviously, market sentiment to Anglo, in particular, internationally was growing. And that was a big concern … I think he was coming back from the airport and came in to me. But we wouldn’t normally ... again, I mean, he was concerned about the issue and I was concerned about the issue. We’d all been away for St. Patrick’s Day and he updated me on it.”104
In March 2008 John Hurley and Pat Neary began approaching individual banks to encourage them to place deposits with each other in what was referred to informally by the Joint Committee in the public hearings as the “Green Jersey” agenda. When asked about it, John Hurley said:
“There would have been a discussion when we met some of the major banks about the potential for their assisting smaller banks that came in to difficulty. That would have happened and you ... you would expect in a banking system that if a small bank was in difficulty, that the first port of call would be the main banks because private sector solutions would be the main vehicle at that stage.”105
According to Patrick Neary:
“we did have a series of meetings essentially with the larger banks to see would they be prepared. And, in principle, yes, they felt there was merit in it but at the end of the day they were saying, ‘Well, look, if we’re going to commit to this we need them to have some form of backing from the Central Bank.’ So it kind of ... it, it never really progressed.”106
Tony Grimes, former Director General, Central Bank, told us:
“it wasn’t really a policy decision, it was more something that you know emerged in the course of the frequent meetings that we would have had with all the individual institutions. And in the context of the exploration by them, and us, of what measures might be put ... be put in place to make the liquidity situation somewhat better.”107
From the evidence presented to the Joint Committee, it is unclear if the DSG or the Government were made aware that the Regulator and Central Bank were pursuing this strategy.
In April the OECD published their Economic Survey of Ireland.108 In the introduction, it said that although productivity growth had slowed in recent years, the economic fundamentals remained strong.
It also said that housing investment had fallen sharply, but that the downswing in activity could soon be over. However, there was also a risk, highlighted in the report, that the slowdown in the housing market could be sharper and more protracted, with greater implications for employment and the wider economy.
On the financial sector it said that the CBFSAI had moved quickly on the global liquidity squeeze. The OECD report stated the Irish banks were highly profitable and well-capitalised, but also that it was important to be prepared to deal with downside risks.
Brendan McDonagh told us:
“The NTMA had in fact been engaged in discussions with the Department of Finance from April 2008 about the provision of emergency liquidity in circumstances where the Irish banks could not meet their funding requirements from the wholesale markets. This was separate to the engagement we’d been having with the Department of Finance from the summer of 2007 in relation to the NTMA placement of bank deposits ...”109
A briefing note outlining financial market developments was prepared for the Tánaiste for a meeting of Government the next day. The note was based on the Central Bank‘s assessment of financial market developments. The key points were:
Although it described the deteriorating market conditions, the continued access to ECB funding, the difficulty of accessing funds in Europe and the growing prospect of difficulty in the US, the briefing note highlighted that:
“The CBFSAI and industry are continuing to highlight the strength of the Irish banking sector and the quality of the financial regulatory system, Governmental and Ministerial comment on the fundamental strengths of the Irish economy will continue to be important.”112
On the 24 April 2008 an email was also sent between officials in the Department of Finance on the potential for amending the State Guarantee Act 1954 to allow the Minister to provide a guarantee to a financial institution should it be required.113 It concluded that it may be easier and clearer to draft legislation.
Whilst giving evidence to the Joint Committee, Brian Cowen was asked“when is the first time that you became aware that there was a need to prepare legislation that would allow for the potential State guarantee of the institutions?”114 In response, Cowen answered“April-May.”115
Fintan Drury described to the Joint Committee how he had helped arrange for Brian Cowen to address a dinner event for the board of Anglo:
“I had undertaken to ask him to do the event and, indeed, the records in the Department should show that he had at least ... on at least two previous occasions been diaried to meet with us, but other priorities had got in his way. The event was completely unremarkable. I recollect a general introduction by Seán Fitzpatrick, as chairman, and then a broad discussion about all things other than banking…”116
Brian Cowen was asked about the meeting and whether he had brought a briefing document117 prepared that day on“banking sector issues” with him. He said that he did not bring any briefing with him to the event.118 He was also asked if David Drumm had spoken to him, to request that the NTMA place deposits in the bank:
“I think what he’s referring to there is a conversation he says he had with me, and I was sort of saying “Well is that not done already”, because I was thinking back to this question of the letter that was sent out in January, was that not going ahead or was that not happening. And I obviously misunderstood, because that’s what I thought he was referring to. And that was it, essentially. Sin é.”119
Three weeks later Brian Cowen was Taoiseach and the new Minister for Finance, Brian Lenihan, received a briefing from his officials. The briefing included a breakdown of the 6 main financial institutions’ most recent Annual Reports:
Elsewhere the Department of Finance was warning of a possible issue on the income side of the Exchequer as the“end-April taxes were €736 million below profile - 45% of this shortfall is due to the poor performance of Capital Gains Tax. While it is very early to call an end-year position, we are now factoring in a €2 billion shortfall in taxes but have not publicised this as yet.” It further stated that in overall terms the general government balance was likely to be around -2.2% of GDP and that“This represents a significant worsening of the position for this year with serious consequential impacts for next year.”121
Around the same time, the Central Bank contact with the banks had moved to daily calls.122 When asked, Mary Burke, then Head of Banking Supervision at the Financial Regulator, what she remembered of the period from April to June, she replied:
“Now, I will say, in terms of the meetings and the planning that was going on at the time, it was particularly chaotic and, from where I sat, it felt chaotic in terms of the amount of work we were trying to do.”123
In May the ESRI published its Mid-Term Review. John FitzGerald said in his written statement:
‘This report came out at the beginning of the “great recession”. It had an upbeat tone which, as subsequent events have shown, was wholly unwarranted. This was based on the assumption, adopted internationally, that the credit squeeze effects would be short lived, with world growth back at trend by 2010. There was a scenario on a credit crunch. However, even this shock was much too mild. The Review completely missed the possibility of a financial collapse’.124
With financial market conditions continuing to deteriorate throughout 2008, work continued on a draft Bill relating to the proposed powers of intervention. As of 6 June 2008, documentation shows that nationalisation legislation was being prepared.125 According to the evidence of Paul Gallagher, the focus shifted in June to nationalisation of the banks and to the provision of a bank guarantee:
“I believe that it was on 16 June 2008 that there was a particular emphasis on producing the necessary legislation that would provide legal options that included… nationalisation legislation and also the provision of a legislative basis for any guarantee that might have to be offered in respect of any institution.”126
“what happened on 16 June was they said go ahead and draft. It was still focused on a particular bank because that’s what you would do with nationalisation legislation.”127
Kevin Cardiff recalled:
“In the first half of 2008, there was absolutely no serious consideration, which I can now recall, being given in CB/FR, DoF or NTMA to a broad guarantee in respect of a wide range of institutions for a wide range of liabilities, as a discrete policy option, although of course, as I have just noted, there was ongoing work on legislative opt ions which included consideration of how to enable Government to give guarantees in appropriate cases. But at various points in time it seems that a broad Government guarantee did feature in discussions in other quarters. The Governor of the Central Bank, I believe, received approaches in March/April 2008 suggesting that the Government should announce a broad guarantee – though it is possible that what was in mind at this time was a general political undertaking rather than a formal guarantee.”128
“On 17 June 2008, the new Minister for Finance, Mr. Lenihan, in correspondence to Dr. Somers, directed the roll-over of Bank of Ireland and AIB deposits on an unsecured basis and an increase in deposit sizes with Irish Life and Permanent from €50 million to €250 million and EBS from €40 million to €100 million.”129
“The NTMA chief executive also advised that the NTMA did not intend to renew a one-year unsecured deposit of €40 million with Anglo Irish Bank which fell due on 8 August 2008, as the deposit was not covered by the Minister’s December 2007 direction… Mr. Cardiff wrote to me on behalf of the Minister directing the NTMA to place a €40 million one-year collateralised deposit with Anglo Irish Bank and to roll over the NTMA’s €200 million deposits with Bank of Ireland and AIB on a six-month collateralised basis.”130
NTMA now had a total of €790 million in Irish banks (BOI €200 million, AIB €200 million, IL&P €250 million, EBS €100 million, Anglo €40 million).131
Despite providing comprehensive feedback to the Scoping Paper, the Financial Stability Department of the Central Bank and the Banking Supervision Department of the Financial Regulator provided their own Crisis Resolution Options paper in June 2008.132
The Options paper raised a number of concerns regarding nationalisation. It ruled nationalisation out as an option if it would take a long time to enact the legislation or if the announcement of intent to nationalise would be insufficient to stop a run. It also proposed that a bank guarantee would be needed anyway and that the authorities would need to be cognisant of the long term reputational damage to Ireland as a financial centre if an institution were nationalised.133
A further briefing note134 outlining market developments was prepared for the Government. The key points were:
The briefing note for the Minister concluded with the following statement:
“Internationally the financial sector is out of favour. While the Irish financial sector should not expect to be immune to this, the widespread perception that Irish banks are very heavily dependent on property lending has exacerbated the position. As property prices continue to fall, the position of Irish banks is vulnerable to further deterioration.”137
Minutes of the meeting of the Irish Financial Services Regulatory Authority138 recorded that senior management of the Financial Regulator reported on the discussions of the DSG on legislative issues and in that regard, on the preparation of a pro forma draft bill on nationalisation. The Authority asked for a further report at the next meeting on legal options for shortening the timetable of mergers.
In July 2008 Brian Lenihan, then Minister for Finance, wrote to the Attorney General. He marked the letter‘secret.’ He asked the Attorney General to waive the normal requirement of obtaining the Government’s authority prior to referring the drafting of legislation to the Office of Parliamentary Counsel. This waiver was sought on the basis of the exceptional sensitivity and urgent nature of the proposed legislation.139
“I write seeking your agreement for the priority drafting of primary legislation proposals relating to the maintenance of financial stability… given the exceptional sensitivity of the matters concerned and the urgent need to ensure an appropriate level of preparedness for a financial stability event, I would ask for your agreement that the normal conventions are set aside on this occasion.”140
On 7 July 2008, the Office of the Minister for Finance sent a secret Memorandum for Government. The memorandum said that the Live Register had increased from 201,800 at end May to 220,800 at end June. Budget estimates had been based on a figure of 170,000 so this increase would add“some €500 million to expenditure in 2008”141 It was noted that there were also significant spending pressures in the HSE. As a result of these two factors“combined with the tax shortfall of at least €3 billion”142 there was now“a strong likelihood that we will be in breach in 2008 of our EU commitments arising under the Stability and Growth Pact and our membership of the Euro area.”143
The Domestic Standing Group met to prepare a report for a meeting of Government. Attendees at this meeting included more senior officials from the Department of Finance and the Central Bank than had previously attended Domestic Standing Group meetings. They included the Deputy Governor of the Central Bank and the Second Secretary of the Department of Finance.
The report confirmed that the Central Bank was“staying in close touch with the Irish banks”144 and that the sharp decline in Irish bank share prices had not had an impact on the banks’ deposit base.
Two financial institutions (IL&P and Anglo Irish Bank) had recently received a“top up of liquidity.”145
A strong warning signal was included in the report:
“There were some indications that recent falls in share prices reflected share sales by long-term investor indicating that if the current unfavourable market environment persisted there was an increased risk of a general loss of confidence in the Irish banks. International investors believed that the sharp slow-down in the Irish economy and property market would give riseto significant loan losses for the Irish banks, a collapse in profitability and the need to raise significant capital…”146
However despite this assessment the Financial Regulator reported that:
“…a detailed line-by-line examination of its loan book by one of the major Irish banks which highlighted that even allowing for 'worst-case' loan losses, profitability would remain strong measured against objective market benchmarks.”147
Con Horan attended this meeting of the DSG in his former role of Prudential Director of the Financial Regulator. He was asked by the Joint Committee how this information was sourced and how had it been verified. His response was:
“…they [banks] would have been doing their own analysis and contingency planning. I don’t think that we went in to check that at that time, in July 2008… It would have been the feedback from the institutions in terms of their observations and their belief, in relation to their [loan] book.”148
On 9 July 2008 there was an email exchange149 between the Department of Finance and the Central Bank on the subject of a Special Resolution Regime. Kevin Cardiff explained this as one in which“you take control of the institution, you manage it out, you share the burden of the losses.”150
John Hurley was asked about this regime:
“It was discussed in the course of 2008 before I left the bank. It was an option that was being looked at. The matter was ... my ... the report to me when I came back was the matter had been discussed with the Department of Finance, and the Department of Finance, I think, were in touch with the Attorney General’s office, and my understanding was this ran into legal and constitutional difficulties… I think the United Kingdom had similar problems with a special resolution regime after Northern Rock. This was not ... this was a very complicated issue.”151
Kevin Cardiff explained the difficulty in introducing a special resolution mechanism by saying that:
“if you wanted to burn bondholders, then ... especially senior bondholders, then you have to talk about major constitutional issues that we didn’t see a way around in sort of June 2008 and even in January 2009, even for subordinated bondholders, there were obstacles, both market and legal.”152
John Hurley gave evidence that the regime was not progressed. When asked if it would have made a difference had it been available on the night of the guarantee he said:
“It strikes me that the decision is very likely to have been the same.”153
On 28 July, Brian Cowen met with Alan Gray, an independent economist and Non-Executive Director in the Central Bank, Seán Fitzpatrick of Anglo Irish Bank, Fintan Drury, a former director of Anglo Irish Bank and Gary McGann, Group Chief Executive of Smurfit Kappa Plc and a director of Anglo Irish Bank at Druids Glen. Brian Cowen described how the event was organised:
“I was talking to Fintan Drury one day and I said to him: ‘Look, I’m going away, I’m going to try and get a couple of weeks off. I haven’t had a break in a long time. But before I go away, could we get a few people together? I just want to talk about people about how they see the economy - how they see things going – because we’re seeing here a slowdown.’ …And he suggested that he’d get a few people together.”154
Fintan Drury said:“We met for about two hours, we went through an agenda that Alan Gray had prepared for the meeting and which did not have banking on it at all.”155
Alan Gray said:
“I was invited, on behalf of the Taoiseach, to attend the meeting to outline any views I had on unemployment and on the ... what was happening in the economy - which is something that many governments have done at different periods - and I put in a lot of effort in advance of the meeting, including talking to some international economists about their perspectives and ideas, and I turned up at the meeting with my detailed notes.”156
Gary McGann said in his evidence that the meeting took place in Fintan Drury’s house, not in the Druid’s Glen golf club as had been previously understood.157
Fintan Drury said:
“Seán Fitzpatrick, Brian Cowen and I then went and played ... I don’t even remember was it nine or six holes of golf and then we went to the bar and had some drinks… Later, Gary McGann and Alan Gray returned to join us for dinner.”158
Brian Cowen said:“It was about economic issues - it was nothing to do with Anglo Irish Bank at all.”159
Alan Gray reflected on his decision to attend the meeting:“I certainly believe, from where we are now and what I know now, that it was a mistake … but I have been so concerned about the issue of unemployment in the Irish economy that I have never not accepted any invitation by any Government Minister or Taoiseach when I have been invited to talk on this issue.”160
The Joint Committee observes that there was very little documentation provided for the month of August 2008. Kevin Cardiff was asked why there appeared to be a gap. He replied:
“I don’t think there was. I mean, August is a time when some people take holidays and so forth but actually there was a lot going on in August. From what I recall, for example, the ... the budget that would normally be in December was ... was going to be in October and ... was brought forward to October. And that decision was made, as I recall, at the very end of August so there were clearly people working on the figures and so forth during August. On the financial side, as I understand it, the ... around about the end of July there was a new iteration of legislation which would have been worked on through August. So it may have been that in the natural course of things that people weren’t sending notes around as much but there was work going on, you can be sure.”161
A secret Memorandum was prepared by the Department of Finance for the first Government meeting since the July recess. The report it contained made for difficult reading. It reported that:
“it is now certain that the end-year tax shortfall will be substantially higher than previously expected. The Department of Finance is currently factoring in a shortfall of €5 billion in tax receipts for the year as a whole and it could be higher.”162
Another note for the meeting on financial market development contained more bad news. The international difficulties and the initiatives in play to help stabilise the situation were outlined. With regard to the Irish Banks the note stated:
In early September 2008, the Financial Regulator circulated a memorandum to members of IFSRA’s financial stability committee on‘short selling164 ’ noting as follows:
“…The issue of short selling has received a lot of attention over the course of 2008. This is due to the fact that the practice of short selling is considered to exacerbate market turmoil adding to volatility and risk in the market. Short selling has therefore been seen as a contributory factor in the problems experienced by financial institutions in particular, on the back of extreme share price declines in recent months...”165
On Friday, 5 September 2008, Moody’s166 downgraded Irish Nationwide Building Society’s (INBS) credit rating by 2 notches.167 Moody’s report stated the downgrade reflected INBS’s increasing exposure to commercial property and development which accounted for 80% of the society’s loan book.168 It also cited the rapid deteriorations in land and property values in Ireland and the UK, which were exacerbating the already high loan-to-value ratios on the INBS commercial property and development loan book.169 The agency expected INBS’s asset quality to weaken as the economic environment in both Ireland and the UK worsened.170
The situation at INBS was exacerbated later on 5 September 2008 when, at 18:15, a report on the Reuters newswire erroneously claimed that INBS was to be liquidated.171
In evidence, Michael Fingleton, former Chief Executive, INBS said that“[on] the night the Reuters report was issued, on the lines, we contacted the regulator’s office and we informed them that the report was totally erroneous.“172
Reuters subsequently edited the story at 20:30 with a denial as to the story’s legitimacy from INBS, before removing the story from its networks at 22:45.
As a result of these two events, the Moody’s downgrade and the Reuters story, a crisis meeting was arranged for 6-7 September between representatives from Department of Finance, the Central Bank and the Financial Regulator, AIB, Bank of Ireland, and INBS. It was to be held in Central Bank Headquarters on Dame Street and was aimed at determining how to deal with the possibility of INBS facing liquidity difficulties on the Monday.173
In explaining these developments, John Stanley Purcell, former Finance Director, INBS noted that:
“The Reuters report was utterly unhelpful. I mean, it created a sense of unease and it was going to result in withdrawals so I mean, the regulator was taking precautions and one of the precautions was to see could a standby facility be arranged.”174
Michael Fingleton explained that:
“...from the regulator’s point of view, they felt and believed that, following the Reuters report, there might be a run on the society or that there would be a run on the society the following Monday […] and that they wished to establish whether a major bank would supply, if the society needed it, some liquidity”.175
As to whether INBS needed liquidity, this was challenged by Michael Fingleton, when he argued that:“we didn’t need to access wholesale funds at that time. We had €4 billion of cash or near cash on deposit with counterparty banks” .176
Nonetheless, the meeting proceeded in order to determine whether AIB and Bank of Ireland would provide a“backstop” facility for INBS.177
When asked whether “AIB and Bank of Ireland indicate[d] a willingness to provide such a backup at that meeting?” John Stanley Purcell answered“No, they didn’t indicate a willingness” , before elaborating“Well, we had a discussion. I can’t remember all the details, but there was three of us there and the meeting just petered out.”178
A minute note taken at the meeting noted that:
“The banks reiterated it was not a realistic proposition for either institution to provide unsecured funding for an entity that had a hole in its balance sheet which would exceed its reserves,”179
Dermot Gleeson, Chairman of AIB, commenting on a meeting held on 7 September 2008 which AIB and Bank of Ireland attended at the request of the Regulator with the Senior Management of Irish Nationwide, said that an assessment was done by AIB itself and the report came back:‘“Don’t touch it” in effect.’180
Richie Boucher, then Chief Executive Retail Financial Services at Bank of Ireland, was also at this meeting and in his evidence to the Joint Committee, he explained that:
“There was no coherent position ... of the problem we were being asked to solve at that moment or the extent of the problem going forward. I have to admit at some stage I said to my colleague, “We should leave this meeting.” We said, “We can’t carry on this discussion.”181
He recalled in evidence:“to be honest, I felt we should get out of the building.”182
The two banks appeared clear in their views that the problems at INBS were not only hard to fully discern but not ones that they wished to take on. Other witnesses gave differing versions of these events.
The view of the Regulator on the meeting was expressed by Patrick Neary in his evidence to the Inquiry as follows:
“Richie Boucher would not have known what information we had on the... on the liquidity of Nationwide because we wouldn’t have been in a position to share it with him because that would be absolutely subject to section 33AK, so he got no information about liquidity about Nationwide from us. A meeting was arranged, attended by the two large banks and Irish Nationwide. If Irish Nationwide chose to be, how would you say, coy or restrictive about the information they provided, look, I mean, that ... that may have happened.”183
John Stanley Purcell commented on this same meeting in his evidence to the Joint Committee as follows:
“information was provided to the meeting at short notice on liquidity, funding liabilities and the maturity of funding liabilities. The meeting concluded without any agreement to progress the provision of a standby facility. Had the matter progressed, any additional information required not brought to the “at short notice meeting” would have been provided .”184
Michael Walsh said:
“On the Sunday evening of 7 September I got a phone call from Con Horan... they had been looking at a contingency plan, as you know, with AIB and Bank of Ireland that hadn’t operated. Apparently, Anglo had contacted the regulator to say that they might represent a solution. I was slightly surprised, but nonetheless the regulator wanted me to meet them. I accordingly organised to meet them the next morning. Having met them, I did a briefing paper for the regulator setting out the options as I saw them at that point in time. I met the regulator, discussed that options paper. I then revised and adjusted that at the regulator’s request and submitted it to the Department of Finance. That paper is in the public domain.”185
The paper186 contained four options for INBS as follows:
In early September 2008, the draft legislation was modified to allow the Minister for Finance to take a Building Society into public ownership if required.187 William Beausang said:
“In early September 2008, this work was reorientated to taking a building society into public ownership on the basis of a major contribution from the office of the Attorney General, and, at a late stage, the Department’s commercial legal advisers.”188
Kevin Cardiff said that this modification was sought by the Department of Finance on the basis of a potential run on INBS. He described the publication of the Reuters report as a trigger event:
“…Reuters ran a story and their story was…Irish Nationwide about to be liquidated. This was a trigger point because that could cause a run ...this was a Friday, it could cause a run the next Monday… this is what we have been getting ready for, this is what we have legislation for.”189
The Department of Finance, through its role on the DSG, liaised with staff of the Attorney General in drafting the necessary legislation:
“…On Friday 5th September 2008 I received a telephone call from William Beausang – a colleague who was heading up the secret work we had been doing on banking crisis preparation…”190
Paul Gallagher said in his evidence:
“originally, it is true to say Deputy, that the focus was on individual institutions… and in August and September, there was a preparation for the possibility that a guarantee might have to extend beyond the individual institution.”191
In his evidence to the Inquiry, Brendan McDonagh, NTMA, recalled this period in September 2008 as follows:“…the whole focus was on having legislation ready to nationalise a building society and a bank, if required. The NTMA provided technical input into that draft legislation.”192
He also said that:
“A separate piece of legislation was also being prepared by the Department of Finance and the Attorney General’s office which would enable the NTMA and the Central Bank to provide secured lending to the financial institutions.”193
On 10 September 2008, the Banking Supervision Department produced a paper at the request of the Department of Finance entitled‘Outlook for Liquidity Irish Domestic Institutions’194 and sent it to Kevin Cardiff. The paper said that there were two groups of banks emerging: AIB, BOI and EBS were having some success in raising funds; IL&P, INBS and Anglo were finding funding conditions very challenging. It gave more detail on the latter three.
Irish Life and Permanent was frozen out of medium and long term funding markets. Short term funding of up to 30 days was available to IL&P but this was unreliable. The paper noted that IL&P had turned to the ECB for liquidity and that it was not anticipated that the bank would be able to move away from this funding for the rest of the year. The paper concluded that a downgrade would cause IL&P significant problems.
The traditional INBS model of relying on retail deposits rather than debt was causing it issues, the report noted, because it had little market access. In addition, the upcoming maturity of some debts was likely to cause issues in the coming period. The report also highlighted recent downgrades by Moodys’ and Fitch as having led to outflows. This, as well as their limited access to ECB funding, meant they needed to acquire funding through the securitisation of some loans. The report also noted that procuring advice from Goldman Sachs was welcome.
At this point, the Financial Regulator painted a pessimistic picture of Anglo’s prospects. It reported that Anglo had been frozen out of the term funding markets, that there was no prospect of a Medium Term Note (MTN), that corporate and retail deposits were down significantly over recent months, and that secured borrowing was one of the few remaining options. The Regulator noted that Anglo suffers from an international perception that it is not “too big to fail” and so was frozen out of international markets. At the same time, the report stated that Anglo was reluctant to seek out ECB funding in case of a downgrade.
On 11 September 2008 there was more negative news for Ireland. Fitch’s agency195 downgraded its rating for INBS by one level to BBB+ from A.196 On the same day EBS reported a half year profit drop of 37%.197
On 13 September 2008 following the meeting between Anglo and INBS, David Drumm, CEO of Anglo, wrote to the Financial Regulator with a proposal on how Anglo would acquire INBS. This would have required Government support for any deficit in the INBS net assets, a funding and liquidity backstop to cover any loss of funding. Funding and liquidity support“comfort” would also need to be provided to Anglo to cover any secondary contagion effects, which would not be made public.198 His letter included the following:“I want to stress to you again that any solution not involving Anglo Irish Bank will lead to problems…”
On 15 September 2008, Lehman Brothers199 filed for bankruptcy.200 With assets of $639 billion and debt of $619 billion, it was the biggest bankruptcy filing in history. Simultaneously contagion fears through exposure to credit default swaps201 engulfed AIG202 leading the US Government to give it a loan of $85 billion. Trust in the wholesale market collapsed as investors looked to see who would fail next.
On 16 September the IFSRA board meeting noted that Anglo, IL&P and AIB were all anticipating breaching regulatory liquidity requirements at various points over the next month.203
Meanwhile, Anglo management was actively considering and pursuing various merger and acquisition possibilities, including a possible merger with IL&P and a possible takeover of INBS following a request from the Financial Regulator. The Board was advised that the Regulator was aware of the challenges facing the banking sector, but that a solution had not yet been agreed. The Board agreed that contact should be made with the Central Bank and the Taoiseach to ensure that there was Governmental support for a workable solution.204
A background note provided to the Minister for Finance and dated 17 September 2008 stated:
“The vulnerability to adjustments in the property sector and further tightening in the availability and cost of credit internationally has put Irish banks under increased pressure. This is impacting individual institutions differently, but all are under pressure, especially the smaller ones.”205
On 18 September Michael Fingleton had a meeting with the David Doyle, Secretary General of the Department of Finance. He explained:
“The purpose was to ask or suggest to the Government that they would increase the guarantee on deposits from €20,000 to €100,000. That was the purpose of that meeting.”206
The proposal to increase the Deposit Guarantee Scheme was raised by the Central Bank on the same day at a meeting with Brian Lenihan and others.207 A one page minute of the meeting also records a report from John Hurley that liquidity was under great strain and there was now a“potentially serious crisis.” John Hurley said that liquidity was tight for all six banks; AIB and BOI were“ok for now” , EBS and IL&P had ECB access, but INBS and Anglo were facing very immediate problems. Anglo was reported as“the bigger problem” and if it didn’t stabilise could create“knock on difficulties” .
The Central Bank proposal to increase the Deposit Guarantee Scheme to cover deposits of €100,000 was agreed to by Brian Lenihan and he asked that a statement be prepared on the Scheme immediately.208
There was a growing question at this time over the sufficiency of the Financial Regulator’s knowledge of the banks’ liquidity and balance sheet positions. Kevin Cardiff said:
“we believed ... were led to believe that the regulator had a good picture of the banks under its remit, that reasonable loan loss stress testing had been done, that the banks were regarded as solvent, resilient, capable of withstanding significant shocks and we accepted that. And we stopped accepting it at the beginning of September when, when we had the Nationwide issue and it became clear that in fact, this general sense of how the banks were being run wasn’t, wasn’t being backed up by very specific data.”209
He said:“myself, Brendan McDonagh, John Corrigan decided that we needed this kind of advice210 ”
John Corrigan said:“… there was a dearth of knowledge, of detailed knowledge around the institutions…”211 Following their meetings earlier in the month the NTMA encouraged the Central Bank and the Financial Regulator to get consultants into the banks to do a“deep dive”.212
As a result, the Department of Finance and NTMA encouraged the Financial Regulator to commission Goldman Sachs and PwC to get more detailed information on the balance sheets of INBS and Anglo respectively. At the same time, the NTMA commissioned Merrill Lynch and Morgan Stanley as its external advisors.213
It was put to Patrick Neary that the State had paid millions of euros to outside consultants in September 2008 to carry out a review in relation to bank loan books and to capital adequacy; information that the Financial Regulator, required the banks to report on a daily/weekly/quarterly basis. He was asked why these consultants were required. He said:
“…the Authority (IFSRA) decided to quality assure the information that we had, that it would be good to have another set of eyes to look at the information and to make sure that we came to the same consensus view…”218
He also responded in a witness statement to the concerns regarding the adequacy of the Financial Regulator’s information:
“It is not clear, however, what those inadequacies were... At no stage can I recall any such concerns being escalated to me. In the years preceding the crisis, the Banking Supervision Department of the Financial Regulator had implemented, in full, the prudential data reporting requirements (Finrep) of the EU Basel 2 Directive and had supplemented these quarterly reports with additional quarterly reports on non-performing assets and loan loss provisioning levels.”219
He said the findings of the external advisors confirmed information the Financial Regulator already had.220
The Financial Regulator,“with a little bit of pushing” according to Kevin Cardiff,221 engaged PwC on 18 September specifically to review Anglo’s short term liquidity, credit quality and management assumptions in respect of these. Dennis O’Connor of PwC recollected:
“We commenced our work on Anglo Irish Bank on the following day, 19 September. Over the following number of days, our engagement was extended to include Irish Life and Permanent and Irish Nationwide Building Society.”222
On Friday, 19 September 2008 the INBS board formally met to consider an approach from Anglo to merge. A merger of INBS and Anglo had been suggested after the meeting with the Regulator on the 7 September. They considered that it had no benefit for INBS, because all the“upside” would be on the Anglo side.223
Discussions had been held by IL&P and the Financial Regulator and Department of Finance officials during the days prior to 19 September. The IL&P board met on Friday 19 September and was briefed on these discussions.224 The position adopted at that meeting was:
On 20 September, Ireland’s Deposit Guarantee Scheme225 was increased to €100,000 from €20,000 to try to reassure depositors that their money was safe. A briefing note for the Taoiseach, stated:
“The Governor of the Central Bank and the Financial Regulator have stressed repeatedly that Irish financial institutions are well capitalised and liquid with good quality assets.”226
On the same day, the Morgan Stanley report on IL&P227 was presented to the Department of Finance. This report was based primarily on management accounts and discussions with management.
Morgan Stanley advised that the IL&P loan book was generally low risk, but 2006 mortgage and commercial lending were likely to cause bad debt provisioning to increase significantly in the future.228 The bank had stopped“buy to let” lending and commercial lending was at an absolute minimum since early 2008.
Regarding liquidity,“both ratings agencies had IL&P on negative outlook” and the bank was relying heavily on ECB funding as the interbank and debt markets were effectively closed.229
The Morgan Stanley report presented Government with six potential options to lend support should the bank encounter difficulties, ranging from provision of equity capital by the State through to a good bank/bad bank split.230
A series of meetings between Patrick Neary and six Irish banks took place on Saturday 20 September to try to ascertain the true liquidity position of each bank. As the minutes of these meetings are covered under Section 33AK the identities of the institutions cannot be disclosed.
Bank A advised the meeting that it had a confidence and liquidity issue. It had experienced €700 million of withdrawals since Q3 2007 and was concerned that it would suffer further withdrawals from deposits accounts above the new €100,000 guarantee limit. A document outlining the options available to the bank was presented at the meeting.231
Bank B advised the Financial Regulator that it was experiencing significant liquidity issues. Money was flowing out of deposits and the bank requested liquidity support in the form of a Central Bank promissory note.232
Bank C said that it would be out of cash in a matter of weeks. Irish lines were being cut by large depositors and if the current pace continued, then it would be in difficulty even sooner. It advocated a statement that no creditor of an Irish regulated entity will lose/fail. It said it could not offer funding for Bank A as it would be bad for its own rating.233
Bank D advised the Financial Regulator that it had lost access to US$ funding and that it had US$20 billion repayable in 30 days. It also advocated against involvement with Bank A, as it was considered that there would be a serious contamination risk.234
Bank E told the Financial Regulator that it was“in good shape” and that it was in talks with Bank F regarding a takeover. The Financial Regulator was also informed that Bank E regarded merger of Banks A and B as“not credible” .235
Bank F advised the Financial Regulator that its asset quality was high and that its capital could absorb all impairments even under most stressed scenarios. Funding was regarded as the big challenge. It was also stated that it regarded an amalgamation with Bank E as having potential, with productive discussions well underway.236
On 21 September 2008, Kevin Cardiff and other Department of Finance officials met with Goldman Sachs prior to receiving its report on INBS which had been commissioned over the weekend of the 6/7.237
“The assessment was perhaps a bit more upbeat than we had feared at the time, and in retrospect and with all the benefit of hindsight was hopelessly optimistic. On Sunday 21 September 2008, I heard this assessment in a meeting with Basil Geoghegan from Goldman Sachs and various others. While it might be difficult to get 100% back on some of the loans they had issued, there was nothing to suggest any losses could not be absorbed by INBS’ own capital. In other words, they seemed to be in some trouble, would need some help, but were probably solvent.”238
These reports had been commissioned at the “encouragement” of the Department of Finance and the NTMA.
The Goldman Sachs draft report on INBS239 was provided to the Department of Finance on 22 September.
Their findings were based on discussions with INBS management, a data gathering exercise and an initial review of the top 60 commercial exposures. Goldman Sachs advised regarding INBS’ assets that“it is not possible at this point to ascertain the extent, depth, quantum and timing of potential losses.”240
On liquidity, net outflows since 5 September were €868 million (approximately 20% of liquid assets) and“INBS is unable to access unsecured debt markets for liquidity.”241 In short liquidity was“considerably strained.”
On Tuesday at an IFSRA board meeting, it was confirmed by Pat Neary that legislation to nationalise a bank or building society was ready.242
Pádraig Ó Ríordáin, former Managing Partner of Arthur Cox, provided evidence that:
“Arthur Cox was engaged by the Department of Finance on the morning of Wednesday, 24 September 2008, to advise in respect of the emerging banking crisis.”243
Eugene McCague, Chairman of Arthur Cox added:
“We were looking clearly at the option of the legislation for the nationalisation of Anglo and Irish Nationwide. This was what my main, if not sole, focus over those days...”244
There was bad news on 24 September, when CSO quarterly figures revealed that Ireland was officially in recession.245
PwC attended a large246 meeting with officials and advisors on 24 September in Government Buildings. Kevin Cardiff described it as“tense.”247 A minute of the meeting records that representatives of PwC reported on the Anglo loan book, based on the work they had done. At the meeting Pat Neary said that there was no evidence that Anglo was insolvent,“it is simply unable to continue from a liquidity point of view” and that INBS was in a similar situation.
Kevin Cardiff underlined the urgency of the situation and it was agreed to prepare legislation on intervention options, including liquidity support, guarantees, nationalisation and a“bad bank approach” . This appears to contradict the information that Patrick Neary gave to the IFSRA board the previous day when he said that legislation to nationalise was ready.
At a further crisis meeting on Thursday, 25 September, IL&P told the FR that an explicit guarantee was needed.248 Patrick Neary stated that this would cost in the region of €500 billion and went on to say that, if the State stepped in, the taxpayer would expect to get something back i.e. the guarantee was likely to require some surrender of equity. IL&P responded that“the situation had gone beyond protecting equity.”249 IL&P also updated FR on its merger talks with EBS, which it estimated would probably require €7/8 billion to set up on stable footing.
On the same day, John Hurley provided an update to the CBFSAI board on all the banks’ liquidity difficulties and advised that one bank’s situation was most critical. The Government asked for policy options and the resources of the Central Bank and Financial Regulator were committed to work on this as an urgent priority over the coming weekend.250
The meeting was also told that the Central Bank was keeping in close contact with the ECB regarding the difficult situation in Ireland and Europe. John Hurley said he had spoken directly with Jean-Claude Trichet.
It was noted at the meeting that a €20 billion fund from the Central Bank and NTMA would not be sufficient in the event of further liquidity losses by the domestic banks. The key policy item for the weekend would be whether Government should issue a six-bank guarantee.251 The Governor mentioned that an explicit guarantee covering €400 billion liabilities was not something he would have favoured previously; however in the evolving situation, he now believed it required serious consideration.252
That weekend, the CBFSAI produced its own paper on“resolution options” that said a blanket guarantee was the simplest option, and that it would include senior and unsubordinated debt. On the downside, the paper said a guarantee neglected the public interest argument and the potential costs to the taxpayer were unclear. Nationalisation was mentioned in the paper, but with a note of caution regarding the risks of contagion.253
After the meeting CBFSAI board member, Alan Gray254 “decided that evening to write to the Department of Finance, the regulator and the Governor of the Central Bank.”255 He sent a strategic advice paper, presented under Indecon-headed paper, his consultancy company.256
His short paper briefly assessed a range of options to improve liquidity in the banking sector and potential responses to individual banks with liquidity issues.257 On options for the sector as a whole, he said that a state guarantee of all loans merited serious consideration. He also said that a temporary guarantee had some clear merits over an unlimited guarantee but there was a risk of a market event when such a guarantee would end.258 On individual banks he favoured market solutions and said nationalisation was the worst option and said“negative system wide impacts are clear” and “the scale of the exchequer exposure and level of funding required is likely to be much greater when contagion impacts are taken into account.”259
A presentation made to the board of EBS on Friday, 26 September 2008, stated:“Government intervention anticipated and unavoidable; potential scale of intervention is likely to be considerable and could change the Irish banking landscape here fundamentally.”
The presentation noted the extreme stress affecting all Irish institutions and the consequent vulnerability of EBS as a smaller entity among financial institutions.260
Around lunchtime, in an email261 to Brendan McDonagh, William Beausang said the Secretary General wanted an analysis from the NTMA on problems that might be encountered for the sovereign rating if the State provided a“guarantee for all deposits/credits of the domestic banking system or would have to provide substantial funding … for institutions taken into protection regime.” The Secretary General also noted that a system-wide guarantee would be controversial from a“State aid perspective.”
In his reply262 Brendan McDonagh said“this is very difficult to answer” as the potential exposure to the State“is not yet independently quantified” . He said Ireland could“expect to be put immediately on negative watch and probably soon after be downgraded” . He estimated that combining the taking on of balance sheets of both Anglo and INBS of €110 billion and“guaranteeing the others of over €420 billion” with a deteriorating budget deficit would lead to“an increase in the cost of funding of perhaps at least 1 percent funding costs. If the State is funding a €50 billion national debt and a €110 nationalised bank” then this increase would cost an extra €1.6 billion per annum.
On the same day Merrill Lynch (who had been formally engaged by the NTMA on 23 September to advise the Government), presented a draft preliminary analysis263 to a group that included the Minister for Finance along with a number of senior representatives from the Central Bank, Financial Regulator and the Department of Finance.264 Merrill Lynch pointed out that it had been engaged for just 48 hours and had“not spoken to the management of any of the Irish banks” and that its analysis was based on“limited verbal information from the Ministry for Finance and IFSRA.”265 The slides from Merrill Lynch’s presentation gave pros and cons for a number of options including a Guarantee, a Secured Lending Scheme/ELA, Good Bank, Bad Bank, Protective Custody, and Liquidation.
A minute from the meeting266 records that on a blanket guarantee, Merrill Lynch felt that this“could be a mistake and hit national rating and allow poorer banks to continue.” Dangers included“credibility and prolonging of weak institutions.” They said liquidation was the worst solution. The Minister asked for opinions to be articulated clearly over weekend“so as to be ready to present to Govt.”
In an interview for the RTÉ documentary“Freefall” in September 2010, Brian Lenihan said:
“Mr. Trichet rang me, and hadn’t been able to get through to me. I was a racecourse in County Kilkenny at a Fianna Fáil event on the Saturday [27 September]. So I caught up with Mr. Trichet’s message the following day which was that ‘you must save the banks at all costs’ ” .
Jean-Claude Trichet,267 former President of the ECB was asked to comment on the RTÉ interview and said that there was:
“No message to Brian, no message to the Government of Ireland, but, if you read the papers, at the time, all central bankers of the world were telling all governments “Don’t do again Lehman Brothers” So, put that in your mind. There was no call from me to Brian.”268
John Hurley told the Joint Committee that he had been in contact with Jean-Claude Trichet over the period leading up to the end of September, through various meetings; formal meetings in Frankfurt, informal meetings and teleconferences.269 He confirmed that the liquidity position of the Irish banks was known to the ECB:
“The liquidity positions in relation to the Irish banks would have been pretty obvious as a result of the developments that were taking place on the ECB funding and that was moving in a particular way in the course of 2008.”270
He also said that“…the liquidity position of one bank in particular was known.”271
In response to the question“Were you personally aware of the deteriorating liquidity and solvency in Irish banks in Ireland in 2008, in particular September 2008?” Jean-Claude Trichet replied:“I was aware of the liquidity constraint. I have to say all over Europe… And the Irish banks were part of it. But again, at that time, it was a general problem.”272
When asked:“Did the Governor of the Central Bank of Ireland brief you or your officials in the ECB on the liquidity-solvency situation and the options being considered?” He replied:
“I would say … Ireland was one of all the advanced economies, one of course of the 15 I already mentioned in Europe, and we had the same, I would say, message for all, “We are in the worst crisis since World War II, make no mistake, it is exactly the situation, it is absolutely drastic, you have to take that into account. On our side we are doing all that we can on the liquidity basis, you are responsible, your government, for the solvency basis.”273
AIB noted at its board meeting that Sunday, that:
“…the authorities expected that two financial institutions would fail (unless white knights emerged), and would guarantee the obligations of the other financial institutions on a temporary basis.”274
At a separate meeting, PwC presented its initial findings on Anglo, IL&P and INBS to the Central Bank and the Department of Finance since its appointment on the 18 September. This report focused principally on short term liquidity, credit quality and capital assumptions made by management in respect of these issues.
In an email later that day to Brendan McDonagh of NTMA, John Loughlin of PwC gave summary scenarios for the three banks discussed that morning: Anglo, IL&P and INBS. It recommended having contingency plans for all three in the week commencing 29 September. The analysis in the Memorandum of 28 September 2008 on the banks’ loan books was based only on information that had been provided to Merrill Lynch from PwC regarding Anglo, from Goldman Sachs regarding INBS and limited verbal information from the Department of Finance and IFSRA.275
Following its draft report presented on Friday 26 September, Merrill Lynch provided a more detailed report by way of Memorandum
277 on Sunday 28 September 2008. The analysis in the Memorandum of 28 September 2008 on the banks’ loan books was based only on information that had been provided to Merrill Lynch from PwC regarding Anglo, from Goldman Sachs regarding INBS and limited verbal information from the Department of Finance and IFSRA. This report was presented in NTMA Treasury building on the Sunday morning.
278 In summary, the report noted:
Only 3% of the Anglo loan book was regarded as impaired by its management at that time. Merrill Lynch felt that falling property prices are likely to impact their book, particularly where they have lent on speculative development. The main issue for Anglo was a pressing need for liquidity as a result of a sustained outflow of corporate deposits and overnight funding being unavailable to banks of their credit rating. Merrill Lynch noted that Anglo had formally requested a short term liquidity advance of €1.7 billion from the Central Bank on Friday 26 September for the end of the month.
The asset quality of IL&P was reported as good but they were heavily reliant on wholesale funding and approaching the limit of their eligible collateral with the ECB.
Merrill Lynch also outlined strategic options on the reviewed banks, all of which would have required financial resources from the Government.279 Among the six options considered was state protective custody for Anglo and INBS which Merrill Lynch felt would solve immediate liquidity issues, but at a high cost. On the impact on equity/debt holders, the report noted that“there are significant retail interests.”280 Another option was a good bank/bad bank scheme whereby the bad loans of the banks would be transferred to a State bank to allow a controlled orderly wind down. The report noted that it was difficult to predict how long the work out of the assets would take but Bank of Ireland published projections showed a three to five year period is required to recover 80% – 90% of book value. On the options of a state guarantee to all depositors and senior creditors of the six primary regulated financial institutions, the report noted that this could be over €500 billion, and that the wider market would have been aware that Ireland could not afford it if the guarantee was called in. It was commented that it might also be poorly perceived by other European States if liquidity flows were to migrate.
One option was discounted:
“…allowing an Irish bank to fail and go into liquidation without any government intervention. Whilst this option would initially have no financial impact to the government… The ensuing ‘firesale’ of assets could precipitate dramatic asset deflation and hence force other Irish banks to take significant write downs on their own asset portfolios thus depleting their capital positions.”281
The report concluded:
“The market environment is highly uncertain with international developments adding to the pressure on Irish financial institutions… In this context, it is important for the Government to be prepared to act quickly and decisively as required, to step in and prevent a systemic problem.”282
A pre-budget Cabinet meeting was held on Sunday, 28 September 2008. A Department of Finance briefing note prepared for the meeting stated that“a tax shortfall of the order of €6.5 billion was likely by 2008.”283 After the budget discussion284 Brian Lenihan gave an oral presentation on the international financial markets and their impacts on the Irish banks.285 The Minister explained how the volatility of the markets was adversely affecting liquidity positions.
The Joint Committee sought to determine whether the Cabinet had come to any conclusions on the banking crisis at its meeting. Dermot McCarthy responded:“I can say very emphatically that there was no decision in respect of any banking matter taken at that meeting.”286
Former Minister, Mary Harney’s memory of the discussion at the end of the Cabinet meeting was:
“… that banks were running out of money, that they were solvent but that they were running out of money… But I was aware that a serious situation was emerging, it wasn’t a surprise to me.”287
Mary Harney also stated that at the Cabinet meeting of the 28 September 2008:“I don’t think the word “guarantee” or anything like that was mentioned.”288
Dermot McCarthy also said that:“... there was no orientation or mandate in respect of an approach arising from that Government meeting.” However, when asked if Cabinet members might have been aware of unfolding events, Dermot McCarthy said:“... I think it would be fair to say that they wouldn’t have been surprised that something did arise.”289
Anglo Irish Bank held a board meeting on 29 September. The minutes reported that the Group had experienced another day of outflows from the wholesale Funding Desk. Senior management in Anglo had decided to propose to BOI and AIB a joint approach to Government to discuss their concerns.290
Dermot Gleeson confirmed that Seán Fitzpatrick had sought a meeting with him in his capacity as Chairman of AIB:
“I had a phone call from Sean Fitzpatrick asking for a meeting, which I declined, and he also asked me if I’d go with him to the Central Bank, I think, or go to the Government. I’m not sure. Anyway that meeting did not happen.”291
Chairman of Anglo, Seán Fitzpatrick and its Chief Executive, David Drumm met with the Chairman of Bank of Ireland, Richard Burrows and Group Chief Executive, Brian Goggin. The meeting lasted“maybe 30 minutes, 45 minutes.”292
Richard Burrows said:
“ they asked us if we would consider taking over Anglo, if we would consider buying any part of Anglo, they were looking for any kind of assistance at all that we could offer in a situation which was clearly of the utmost severity in terms of that default which they were likely to have the following morning.”293
Brian Goggin said:
“we had absolutely no interest in acquiring Anglo Irish Bank and we politely told them that we could not be of assistance.”294
Seán Fitzpatrick and David Drumm called to Alan Gray that same day:
“I did not invite them to come, they came. I believed they understood that the bank would not open the next day because that was the information that was available to the Financial Regulator and I think was widely known in the market. And I think they were very keen to try and find any option or any channel to, you know, have their views aired. They came and they ... Mr. Drumm had a presentation with him. I told him I had a very busy day and, you know, was there ... I’d prefer he would just tell me what was the purpose of the meeting. And he went through a number of points in his presentation. He didn’t leave it with me. I told him these were issues that they should talk directly to the Central Bank on, and to the Financial Regulator, and that was what happened.”295
The Anglo minutes also record that“Bank of Ireland felt it was worthwhile,”296 but the AIB Chairman had declined an invitation to meet. The minutes also record that the Chairman and CEO reported“on a number of discussions” during the day with John Hurley regarding the urgent need for a solution to the systemic liquidity issues facing the system. They said they were advised that a solution would be forthcoming.297
Richard Burrows also met with John Hurley that day. He had a pre-arranged meeting. He said this was to:“talk about other matters which had to do primarily with wholesale funding and collateral for funding.”298
He also said that he took the opportunity:
“of explaining to Mr Hurley, the visit that I’d had from Anglo and explaining my concern at the very difficult situation which could result from this default the following morning and I asked if there was any plan in place in the Central Bank to deal with the situation.”299
He said he was:
“…somewhat surprised to find out that there was not and it was Mr Hurley’s guidance to me that if I wanted to take matters further, that I should make an approach to Government.”300
According to the Bank of Ireland Board minutes, the Central Bank and Financial Regulator asked Bank of Ireland to consider acquiring IL&P in a situation where Anglo and INBS had already failed.301
Richard Burrows’ impression was that John Hurley was:
“…surprised at the information that I gave him that we’d had this call and this visit by the Chairman and Chief Executive of Anglo and the state of desperation which they had reached on that morning.”302
John Hurley, in his evidence said that he had not been informed of the meeting between BOI and Anglo that day“… I don’t believe he [Burrows] told me about that meeting. I believe what he told me about were the problems of Anglo Irish.”303 John Hurley also noted in his evidence that confidentiality considerations would have restricted the context of the discussion of these matters outside of the relevant participants.
Brian Goggin said:
“The issue confronting us on 29 September was the fact that I and the Governor of the Bank of Ireland had been put on notice that Anglo Irish Bank was going to default the following day.”304
Richie Boucher said in his evidence to the Joint Committee that:
“Anglo had come to us [BOI] that afternoon to say “we’re going to default” that’s effectively what they said, and my belief is that our chief executive and our chairman felt that they had to tell the Government something was going.”305
Brian Goggin informed BOI Group Liquidity Committee that a meeting had been arranged with the Taoiseach for later that evening at which a group of senior bankers would discuss the possibility of a Government guarantee being provided for all borrowing by Irish institutions.306
During the day also according to William Beausang:
“work was being carried out with the office of the Attorney General on the emergency legislation”.307
Brian Lenihan had a pre-arranged meeting with former General Secretary ICTU and Central Bank board member, David Begg, to discuss the mounting problems facing the economy and the labour market. David Begg confirmed to the Joint Committee that they did not discuss the banking crisis.308
AIB Chairman Dermot Gleeson said:
“In the afternoon of Monday the 29 September I received a phone call from Richard Burrows of Bank of Ireland. At that stage there was extreme turmoil in the markets and there was a clear impression that Anglo was in serious trouble and that the plan of the authorities was to take Anglo and INBS into some sort of State care – Richard indicated that matters were so difficult we should seek to speak with the Taoiseach and Min for Finance.”309
Richard Burrows said:“a phone call was made out of our office in Bank of Ireland to the Taoiseach’s Department and as a result of that, the meeting was set up.”310
Richard Burrows said that the purpose of the meeting was:
“…. to make sure that they (Government) were fully aware of the severity of the situation that could unfold the following morning and the impact that they could have on the banking situation of large.”311
Dermot Gleeson said that the purpose was to:
“….discuss the dramatically deteriorating international solution, the apparently dire straits in which Anglo found itself and the possible repercussion of Anglo’s imminent collapse for Bank of Ireland and Allied Irish Bank.”312
The meeting was arranged for 21:30,“that was the time we were told to come.”313
Chapter 6 Footnotes
1. The Economic and Financial Committee is a committee of the European Union set up to promote policy coordination among the Member State.
2. EU structures for monitoring financial stability and managing financial crises, DOF06167; Crisis Management Exercise: lessons learned and possible follow-up, DOF06159; Next Steps in developing the EU framework for financial stability and crisis management, DOF06139-004; Next Steps in developing the EU arrangements for financial stability, DOF06204-005.
8. Standard & Poors, is one of the three recognised major international statistical rating agencies, Moody’s and Fitch’s being the other two.
55. Deloitte, Ernst & Young (EY), KPMG and Pricewaterhouse Coopers (PwC).
89. A loan with a moratorium is one where agreement is given to either cease repayment of principal or interest, or both, for a certain period of time.
90. This refers to the final repayment of a loan, which consists of the whole sum borrowed at the start. Any interim repayments are interest-only.
102. Seán Quinn, former Chairman of the Quinn Group.
164. See Glossary of Terms.
166. Moody’s is one of the three recognised major international statistical rating agencies, Fitch’s and Standard & Poor’s being the other two. Moody’s report had indicated the downgrade would probably be greater except they anticipate there is a moderate probability of systemic support to INBS in the event of financial crisis.
167. Moody’s uses a global rating scale, ranging from AAA, being highest quality - lowest credit risk through to C being lowest rated - typically in default with little prospect of recovery. Within each rating classification, there is a 1,2 or 3 indicating higher or lower end of that generic rating. E.g. A3 to BAA2 is a 2 level (notch) drop.
168. Committee of Public Accounts Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012 (21 note to minister re Moody’s downgrade of INBS), PUB00072-217.
171. This Reuters report was subsequently retracted and is no longer available.
187. Credit Institutions (Financial Support) Act 2008 (CISA).
194. Committee of Public accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012, (Appendix 2 document no. 20 Letter dated 10 September 2008 from Financial Regulator to Department of Finance with enclosed report on liquidity conditions), PUB00072-217.
195. Fitch’s is one of the three recognised major international statistical rating agencies, Moody’s and Standard & Poor’s being the other two. This downgrade mirrored the same sentiments for downgrade by the Moody’s 5 days previously.
199. Lehman Brothers was a global financial services firm. It was the fourth-largest investment bank in the US (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research, investment management, private equity, and private banking.
201. A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer (usually the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event.
202. American International Group (AIG) is a US multinational insurance corporation with more than 88 million customers in 130 countries and is one of the world’s largest insurers. It was deemed too big to fail by the US Government.
205. Committee of Public Accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012 (Appendix 2 document no. 16 Background note for Minister for Finance on Financial Market Developments to 17 September 2008), PUB00072-217.
207. Note of meeting, 18th September 2008. List of attendees: Brian Lenihan, Department of Finance (Kevin Cardiff and David Doyle), NTMA (Michael Somers, John Corrigan, Brendan McDonagh), CBFSAI (John Hurley, Tony Grimes, Brian Halpin) and the Financial Regulator (Jim Farrell, Patrick Neary), DOF03376-001.
208. Note of meeting, 18th September 2008. List of attendees: Brian Lenihan, Department of Finance (Kevin Cardiff and David Doyle), NTMA (Michael Somers, John Corrigan, Brendan McDonagh), CBFSAI (John Hurley, Tony Grimes, Brian Halpin) and the Financial Regulator (Jim Farrell, Patrick Neary), DOF03376-001.
215. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-036. Morgan Stanley were initially approached as advisors, this did not proceed beyond a couple of days owing to possible conflicts of interest.
227. Committee of Public Accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012, (Appendix 2 document no. 11 Discussion Documents prepared by Morgan Stanley), PUB00072-217.
245. The common definition of a recession is two successive quarter of decline. CSO Quarterly National accounts, quarter 2 2008 stated: GDP decreased by 0.8% compared to same period 2007. This is the second successive quarter in which GDP showed a decrease. [source: CSO.ie ref 180/2008].
246. Attendees Brian Cowen, Brian Lenihan, the Attorney General, Pat Neary & Jim Farrell (FR); John Hurley & Tony Grimes (CB); David Doyle & Kevin Cardiff (DoF); Dermot McCarthy (DoT), Michael Somers & John Corrigan (NTMA) Basil Geoghegan (Goldman Sachs); Henrietta Baldock & Prasath (Merrill Lynch); Denis O’Connor (PwC); Eugene MacCague (Arthur Cox), DOF03377.
254. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants. [Brian Cowen stated to the Inquiry that he was someone whose views he respected], transcript, INQ00089-007.
267. Jean Claude Trichet, former President of the ECB, presented a paper and responded to questions by members of the Joint Committee of which he had prior notification, at a meeting of the Institute of International and European Affairs at the Royal Hospital Kilmainham on 30 of April 2015. He did not appear as a witness before the Joint Committee, nor could he be directed to appear because he is not an Irish citizen, nor is he resident in the State. He was subsequently requested by the Joint Committee to assist the inquiry on issues where material clarifications were required. He chose not to assist.
305. Richie Boucher, Group CEO, BOI, transcript paragraph 606. BOI Court minute extract dated 3 October refers to a visit by Fitzpatrick and Drumm to BOI to consider a takeover of Anglo. They also advised that they would be approaching AIB with the same request, BOI03886-002.