September 29/30, 2008 - why did the mistake happen? Can it happen again?

He3

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The government says the Banking Inquiry will be limited to examining why the banks failed, and will not examine the government's response to the failure. Any promise to release documents to the Banking Inquiry has to be seen against that limitation - it will not be given any paperwork relating to the government response. Given how the decision was taken, though it became a government response, it was in reality the response decided on by just two men: the Taoiseach and the Minister for Finance. And there is to be no inquiry into that.

So it is up to us citizens to figure out why they responded as they did.

Why did the Taoiseach and MinFin reject nationalisation of Anglo Irish Bank and instead guarantee all of its liabilities?

The Taoiseach and Minister for Finance says that they were under awful pressure. Decisions had to be taken at speed in the middle of the night. They acted on the best advice from the Financial Regulator, NTMA, Central Bank, and Department of Finance. They took the least worst option as it appeared to them at the time.

But is that true?

Today some more light is cast on the events of that evening by Simon Carsley here .

Simon Carsley said:
ALLIED IRISH Banks (AIB) and Bank of Ireland (BoI) were asked during crisis talks on the night the Government bank guarantee was introduced in late September 2008 how much they could provide in liquidity to Anglo Irish Bank, according to well-placed sources.

During emergency discussions with the Government and senior regulatory officials, both banks consulted their treasury departments shortly after talks began late on Monday, September 29th.

Both heard from their treasury units within hours and determined that they each could provide €5 billion in loans to keep Anglo float.

The two banks believed that the loans to Anglo, which had haemorrhaged deposits during September 2008 at the height of the financial crisis, would be only temporary and that Anglo would be nationalised the following weekend.

Nationalisation was regarded as impossible midweek while markets were open, as it would affect the other listed institutions.

AIB and BoI both sought assurances from the Government that night that the €10 billion would be repaid that Friday ahead of the Government’s expected nationalisation of Anglo.

The following day, neither bank was contacted by the Central Bank, the Financial Regulator or Anglo in relation to the loans of €10 billion, or received any explanation as to why the loans weren’t needed.
The government has issued a classic 'non-denial denial' of claims that legislation to nationalise Anglo Irish Bank was available on the night.

It is widely accepted across all shades of political opinion that the guarantee given in respect of Anglo Irish Bank was a mistake.

We need to learn from mistakes to minimise our chances of repetition. Given our history of banking scandals and insurance industry scandals, each more expensive than the last, that may be a pipe-dream but let's try.

Why did this mistake happen?
 
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richie268

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Nationalisation was regarded as impossible midweek while markets were open, as it would affect the other listed institutions.

Both heard from their treasury units within hours and determined that they each could provide €5 billion in loans to keep Anglo float.

Absolute Bolix!
 

powderfinger

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Thanks for posting Simon Carswell's article He3.It is also interesting to note that according to Carswell's sources (who would be well placed )it is claimed that the 4 bankers came with different hymn sheets that night.
Banking sources differ on what the two financial institutions wanted at the meeting. Sources with knowledge of AIB’s position on the night said the bank sought no support for itself but pressed that the Government needed to act to prevent Anglo’s collapse.
The sources claimed that the senior bankers in attendance – Dermot Gleeson, then chairman of AIB, and then chief executive Eugene Sheehy – were told the State had prepared a guarantee scheme that could protect the entire system but that they would have to ask the Government for it.
BoI, which was represented by then chief executive Brian Goggin and governor Richard Burrows, argued for Anglo to be nationalised and the other institutions guaranteed, according to sources familiar with its position that night.
Vincent Browne interviewed Brian Lenihan on TV3 last July.In passing comment on the September meeting Lenihan stated that his decision to implement a blanket guarantee was made in response to a request from the bankers in attendance that night.
Which bankers was Lenihan referring to?

http://www.politics.ie/current-affairs/82235-brian-lenihan-one-one-nightly-news-vb-tonight-thurs.html
 
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The inquiry is to look in to the 'causes' of the banking crisis and is not allowed to look in to the response of the Government. I wonder does that mean that the inquiry is not allowed to look in to the response of the Government to the 'causes', i.e. what they did or didn't do when they were being told of what was coming over previous years, rather than what they did in responding to the September 2008 crisis? I wonder, also, does that then rule out investigation of those cosy dinners?...
 

Aristodemus

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I don't think it was anything sinister such as protecting influential friends etc, I think it has to do with the fact that these guys are out of their depth. Lenihan, who seems to get good press for some reason is totally in thrall to his advisers. At the end of the day he's a lawyer and knows nothing of finace or economics. McWilliams lifted the lid on him and if the Government hadn't so many friends in the press, particularly Independent Newspapers, a lot more would have been made of Lenihan's peculiar behaviour on his visit to McWilliams.
 

DCon

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I don't think it was anything sinister such as protecting influential friends etc, I think it has to do with the fact that these guys are out of their depth. Lenihan, who seems to get good press for some reason is totally in thrall to his advisers. At the end of the day he's a lawyer and knows nothing of finace or economics. McWilliams lifted the lid on him and if the Government hadn't so many friends in the press, particularly Independent Newspapers, a lot more would have been made of Lenihan's peculiar behaviour on his visit to McWilliams.
Garrett Fitz on Newstalk last week said that there were 16 economists in the DoF when he left office and there are now 3.

Did Bertie dumb the DoF down so that he could pull his Strokes without interference?
 

ManUnited

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On the face of it they are a right wing party and acted in accordance with right wing ideology.If it is true that they were under awful pressure and making decisions 'at speed' in the middle of the night then basic political ideologies must have come into play and at least coloured their judgement.If it were a left wing party in power they would not have had the same basic ideological opposition to nationalising the bank (eg. Northern Rock).It's only a thought but we elected a right wing party and should not be surprised when, under pressure, they reacted the way they did.
 

richie268

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I don't think it was anything sinister such as protecting influential friends etc, I think it has to do with the fact that these guys are out of their depth. Lenihan, who seems to get good press for some reason is totally in thrall to his advisers. At the end of the day he's a lawyer and knows nothing of finace or economics. McWilliams lifted the lid on him and if the Government hadn't so many friends in the press, particularly Independent Newspapers, a lot more would have been made of Lenihan's peculiar behaviour on his visit to McWilliams.
The reality of it is that they could of let Anglo go to the wall but instead ordered BOI and AIB
to lodge billions into Anglo.
http://www.politics.ie/economy/126037-what-banks-dont-want-you-know.html
 

FakeViking

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They'd get some kudos if they just admitted that they were bounced into a position where they had to make a decision under pressure and flunked it.
 

He3

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Credit where it is due?

Thanks for the contributions so far. Here is another item of information -

On 30 September 2008 only the Central Bank and the Financial Regulator were cited by Brian Lenihan as advising the guarantee.

That list has expanded in more recent statements to include the NTMA and DoF.

Significant?

MinFin said:
The Bill provides a legislative framework to underpin the guarantee arrangement for depositors and lenders to Irish financial institutions which was announced by the Government earlier today following advice from the Central Bank and the Financial Regulator.
Parliamentary Debates (Official Report - Unrevised) Dáil Éireann Tuesday, 30 September 2008 - Page 1

Not much in that speech has stood the test of time:

MinFin said:
I want to make two crucial points. The guarantee is not free and the taxpayer who ultimately underwrites this support will be remunerated for the value of the support provided. The terms and conditions on which the guarantee is provided will ensure the taxpayer gets value for money.
 
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Nipper

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The reality of it is that they could of let Anglo go to the wall but instead ordered BOI and AIB
to lodge billions into Anglo.
http://www.politics.ie/economy/126037-what-banks-dont-want-you-know.html
Quote:
Originally Posted by richie268
The government ordered AIB and Bank of Ireland to give up to €8 billion in emergency funding to Anglo Irish Bank in the weeks leading up to the ailing bank’s nationalisation in January, The Sunday Business Post has learned.

Correspondence between the European Commission and the government, seen by this newspaper, revealed that the deal was one of a number of measures used to prop up Anglo as it struggled to fund itself in the wholesale banking market." end of quote


So it looks like Anglo had a sudden liquidity issue of around 8Bn

Govt asked Boi and Aib to be prepared to give Anglo a loan.

Dof and other banks wanted Anglo nationalised.

Irish Permanent stepped in with 2 loans that week to a goal of around 7.5bn

At this stage did Fitzpatrick and Neary tell Cowen and Lenihan Nationalisation wasn't needed.

Did they convince them it was a minor Liquidity issue that was resolved through Irosh Petmanent loans?
 

Aristodemus

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The reality of it is that they could of let Anglo go to the wall but instead ordered BOI and AIB
to lodge billions into Anglo.
I agree, there were options open to them, but they were out of their depth and made a decision because they didnt know any better. As for comments from Garret Fitzgerald his kowtowing to the banks was just as bad with the ICI fiasco so he is in no position to criticise anyone.
 

He3

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The government says the Banking Inquiry will be limited to examining why the banks failed, and will not examine the government's response to the failure. Any promise to release documents to the Banking Inquiry has to be seen against that limitation - it will not be given any paperwork relating to the government response. Given how the decision was taken, though it became a government response, it was in reality the response decided on by just two men: the Taoiseach and the Minister for Finance. And there is to be no inquiry into that.

So it is up to us citizens to figure out why they responded as they did.

Why did the Taoiseach and MinFin reject nationalisation of Anglo Irish Bank and instead guarantee all of its liabilities?

The Taoiseach and Minister for Finance says that they were under awful pressure. Decisions had to be taken at speed in the middle of the night. They acted on the best advice from the Financial Regulator, NTMA, Central Bank, and Department of Finance. They took the least worst option as it appeared to them at the time.

But is that true?

Today some more light is cast on the events of that evening by Simon Carsley here .



The government has issued a classic 'non-denial denial' of claims that legislation to nationalise Anglo Irish Bank was available on the night.

It is widely accepted across all shades of political opinion that the guarantee given in respect of Anglo Irish Bank was a mistake.

We need to learn from mistakes to minimise our chances of repetition. Given our history of banking scandals and insurance industry scandals, each more expensive than the last, that may be a pipe-dream but let's try.

Why did this mistake happen?

Simon Carsley goes into more detail on the days and nights leading to the decision to hang a millstone around our necks on September 29, 2008 here -

The big gamble: The inside story of the bank guarantee - The Irish Times - Sat, Sep 25, 2010

Asleep at the wheel, the DoE only gets around to asking for pros and cons of a guarantee at the last minute. Oh and contrary to earlier attempts to say otherwise, legislation was available to nationalise Anglo.

What happened next?
The guarantee may have helped tide the banks over, day to day – at least for several months – but the move was followed by months of uncertainty and indecision about whether the banks had sufficient amounts of capital set aside in reserve to meet the spiralling losses on their massive exposure to the property market.

Since guaranteeing the six domestic banks, the Government has so far been forced to pledge or inject €33 billion into five banks. Given the perilous state of the public finances, most of this money (almost €22 billion) has been provided in the form of promissory notes, or Government IOUs, to spread the payments out over 10 to 15 years.

Only Irish Life & Permanent, which avoided lending to property developers, has avoided a Government capital injection.

The Government has taken ownership of three institutions – Anglo, Irish Nationwide and EBS. It holds a 36 per cent stake in Bank of Ireland and almost 19 per cent of AIB. However, this may rise – possibly to majority State control – if the bank cannot raise €7.4 billion from private investors and asset sales this year.

On top of this, the State is buying €81 billion of toxic property and related bank loans through the National Asset Management Agency, paying an estimated €40 billion.
 
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TODevastated

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On the face of it they are a right wing party and acted in accordance with right wing ideology.If it is true that they were under awful pressure and making decisions 'at speed' in the middle of the night then basic political ideologies must have come into play and at least coloured their judgement.If it were a left wing party in power they would not have had the same basic ideological opposition to nationalising the bank (eg. Northern Rock).It's only a thought but we elected a right wing party and should not be surprised when, under pressure, they reacted the way they did.
FF are not a true right wing party!! they are neither a left wing party, they are a bit of what ever you are having yourself and they try to be all things to all men-a national movement

hence they as a result in trying to hurt no particular sectors make poor decisions or in fact no decisions at all
 

He3

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FF are not a true right wing party!! they are neither a left wing party, they are a bit of what ever you are having yourself and they try to be all things to all men-a national movement

hence they as a result in trying to hurt no particular sectors make poor decisions or in fact no decisions at all
We pay a high price for favouring this school of politics.
 

richie268

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It appears to me to be quite simple. Anglo Approaches AIB and BOI and makes a request for liquidity, both Banks are very reluctant as the dogs on the street know Anglo is up a creek.
Fearing a domino effect both banks approach the Brians and explain that yes they have the cash but need a guarantee from the state that the monies would be repaid and gave a worst case scenario. One of the Brians was on the piss and the other munching on Garlic hence the worst decision ever made by any Government it the history of the world in peace time.
 

DCon

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One of the Brians was on the piss and the other munching on Garlic hence the worst decision ever made by any Government it the history of the world in peace time.
What's not to say that copious amounts of alcohol did not pre-date the garlic munching
 

johnfás

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The guarantee went wrong because they acted without information. The Government had no idea what it was guaranteeing. The answer is you shouldn't make substantial decisions without carrying out due diligence, but a two year old could tell you that. Could it happen again? Of course it could, decisions are more likely to go wrong than right when you are bounched into them in the middle of the night. The answer is you should have the adequate safeguards in place years before to minimise the risk of the crisis ever arising, at least on that scale. One might also argue that the default position when dealing with private companies is to allow the natural course of a private financial disaster to take place. That is easier said than done when you are talking about a systemic banking system. But then again, Anglo was never systemic, nor were its shares widely held.
 

powderfinger

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It appears to me to be quite simple. Anglo Approaches AIB and BOI and makes a request for liquidity, both Banks are very reluctant as the dogs on the street know Anglo is up a creek.
Fearing a domino effect both banks approach the Brians and explain that yes they have the cash but need a guarantee from the state that the monies would be repaid and gave a worst case scenario. One of the Brians was on the piss and the other munching on Garlic hence the worst decision ever made by any Government it the history of the world in peace time.
Willem Buiter's take on the blanket guarantee(FT 2/10/08)is a cautionary interpretation which concludes with a prescient hope for the pockets of Seán Taxpayer.
The Irish solution: unlawful, beggar-thy-neighbour and short sighted, but apart from that OK | Willem Buiter's Maverecon | FT.com

Beggar-thy-neighbour
Financial crises may not be the best time to make friends and influence people, but the Irish guarantee is the most ‘in-your-face’ beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plague-ridden corpses into the cities they were besieging. Between the attempt to favour Irish shareholders at the expense of foreign shareholders and the poaching of UK sterling deposits (and indeed euro deposits anywhere else in the euro area) through subsidy-fuelled interest rate offers, Ireland should not be surprised to encounter limited support and solidarity in the EU the next time the country is up against it, for whatever issue.
 

richie268

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What's not to say that copious amounts of alcohol did not pre-date the garlic munching
Well I have only known one other person to munch on raw garlic and your post sums it up !
 


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