“Unconditional and irrevocable”: the guarantee that brought Ireland to its knees

Gadfly

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Could the bank guarantee have been terminated during the two years from its announcement on the grounds that banks withheld material information? A closer look at the question might cast light on how – and why – we got into what looks like a lost endgame.

Morgan Kelly wrote this in his 8 November article:
"Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke."
If you thought the bank bailout was bad, wait until the mortgage defaults hit home - The Irish Times - Mon, Nov 08, 2010

An Irish Times letter writer returns to this point today:
"I have never seen an insurance contract that didn’t include a clause which rendered the contract void in the event the insured concealed material facts.
The banks concealed the clearly material fact of their insolvency; in the case of Anglo, a lot more is likely to emerge, when the law gets around to those who cannot recall passwords.
The most startling point about Prof Morgan’s claim is that we would need to invoke the 1971 Central Bank Act to terminate the guarantee.
The statutory instruments that introduced the bank guarantee show that not alone were no such obvious and prudent “get-out” clauses included, but they were instead littered with phrases which explicitly prevent any such attempt to revoke them. For example, in SI 490 of the Credit Institutions Eligible Liabilities Guarantee Scheme of 2009, the phrase “unconditional and irrevocable” appears no fewer than six times."
The Irish Times - Letters

To unpick the issues at hand:
Is the analogy with an insurance contract sound?
Could the Anglo Irish Bank dealings (particularly the flip-flop of deposits) which are under criminal investigation justify a challenge on the basis of withholding material information?
Would the fact that the investigations have not to date resulted in criminal charges mean that a challenge based on these dealings would not be entertained by a court?
Does the addition of references to “unconditional and irrevocable” in fact rule out recourse to the 1971 Central Bank Act?
Why was the prudent principle of adding a get-out clause avoided?
Why was the phrase “unconditional and irrevocable” inserted repeatedly?
Is there information which casts light on the drafting process in the official papers which have come into the public domain?

I don’t recall this point being the subject of a thread of its own, but it certainly deserves to be.
 


DeputyEdo

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The sole reason for the bank guarantee was to ensure that FFs mates didn't lose all their cash. Simple ;)
 

He3

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I would guess that the terms unconditional and irrevocable were there to assure those who were intended to be reassured by it that it could not be whipped away at a whim.

The difficulty with the idea that it could be withdrawn for the reasons being suggested is that the third parties relying on it (as distinct from the banks who benefitted from it) were not the wrongdoers. They can hardly be penalised for the banks' conduct. Or am I missing something?

If that is so, the State's recourse would be against the banks. Which is to say, against itself in effect.

Amazing what a panicky government can walk its people into when it is forced to make a quick decision after years of avoiding decisionmaking like the plague, isn't it?
 
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Gadfly

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The difficulty with the idea that it could be withdrawn for the reasons being suggested is that the third parties relying on it (as distinct from the banks who benefitted from it) were not the wrongdoers. They can hardly be penalised for the banks' conduct. Or am I missing something?

If that is so, the State's recourse would be against the banks. Which is to say, against itself in effect.
I am not sure if you can say the third parties are being penalised if you return to the status quo ante. It rather means that their claim is against the bank, as at the start of the process, and they have no recourse other than the pre-existing level of protection.

Admittedly they would likely claim damages for being misled into thinking their money was secure; but this too is on the head of a (hypothetical) bank which was trading while insolvent, but hiding this fact.

And on that point: we certainly have laws against trading while insolvent. Who decided thaty they did not apply to the banking sector?
 

Libero

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He3 said:
I would guess that the terms unconditional and irrevocable were there to assure those who were intended to be reassured by it that it could not be whipped away at a whim.
That seems obvious.

A guarantee over a bank's liabilities (or - eek! - banks' liabilities) won't provide much reassurance to holders of those liabilities if the guarantee is contingent. That's especially true if contingency in question is something as nebulous as "bad behaviour" or illegality on the part of the bank, and when it was uncertainty over such behaviour that caused a run on the bank in the first place.

I think Morgan Kelly is simply wrong on this point.
 

sking81

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I agree with Deputy. I personally think that FF (&FG for that matter) are up to their neck in s*it in Anglo, both the parties and their members. Had the bank gone down it would have taken quite a few of high profile politicans with it. Systematic importance for sure-at the minute bankrupt persons are not entitled to hold elected representative office, in local authorities, in the Dáil or the Seanad. Anglo going down would have wiped quite a few of them out.
 

Odyessus

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That seems obvious.

A guarantee over a bank's liabilities (or - eek! - banks' liabilities) won't provide much reassurance to holders of those liabilities if the guarantee is contingent. That's especially true if contingency in question is something as nebulous as "bad behaviour" or illegality on the part of the bank, and when it was uncertainty over such behaviour that caused a run on the bank in the first place.

I think Morgan Kelly is simply wrong on this point.

A ten year old would understand that point. Try saying to a kid: "if you clean up the backyard, I guarantee I will pay you €20, unless I believe you have not taken sufficient care with the job of which I will be the sole judge."

The child would immediately understand there is no guarantee at all he will get his money.

A guarantee with quibbles built in is useless.
 

Libero

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A ten year old would understand that point. Try saying to a kid: "if you clean up the backyard, I guarantee I will pay you €20, unless I believe you have not taken sufficient care with the job of which I will be the sole judge."

The child would immediately understand there is no guarantee at all he will get his money.

A guarantee with quibbles built in is useless.
Unless, perhaps, you're in Croke Park and negotiating with ICTU :lol:
 

MPB

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A ten year old would understand that point. Try saying to a kid: "if you clean up the backyard, I guarantee I will pay you €20, unless I believe you have not taken sufficient care with the job of which I will be the sole judge."

The child would immediately understand there is no guarantee at all he will get his money.

A guarantee with quibbles built in is useless.
For the delinquent receiving the guarantee maybe.

A guarantee given when you have no idea of the costs is worse for the guarantor.
 

Vega1447

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A guarantee with quibbles built in is useless and ....

A guarantee that cannot be honoured without beggaring a generation is madness.


The guarantee should, even at this late stage, be revoked - if necessary passing a referendum to prevent SC challenges.



Odyessus: A ten year old would understand that point. Try saying to a kid: "if you clean up the backyard, I guarantee I will pay you €20, unless I believe you have not taken sufficient care with the job of which I will be the sole judge."

The child would immediately understand there is no guarantee at all he will get his money.

A guarantee with quibbles built in is useless.
 

Odyessus

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For the delinquent receiving the guarantee maybe.

A guarantee given when you have no idea of the costs is worse for the guarantor.

Who said anything about a delinquent? The point is, a guarantee that can be withdrawn at a whim is no guarantee at all.
 

Gadfly

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Who said anything about a delinquent? The point is, a guarantee that can be withdrawn at a whim is no guarantee at all.
We're not talking about a whim, but about a challenge based on the withholding of material information and adjudicated by a competent court.
 

LDF

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Who said anything about a delinquent? The point is, a guarantee that can be withdrawn at a whim is no guarantee at all.
..and a guarantee covering €440bn issued by a country with annual income of €30bn is what exactly?
 

Squire Allworthy

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Who said anything about a delinquent? The point is, a guarantee that can be withdrawn at a whim is no guarantee at all.

What good is insurance when there are pages of small print with every policy?

In any case a guarantee is limited by the solvency of the person issuing it. One written by a pauper is of little worth.
 

Odyessus

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Tomas Mor

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Heard Lenihan on RTE news with Sean O Rourke for the usual easy ride. Lenny even denied he said bank bail out would be cheapest of all and he got away with it ! Listening to him you wopuld think everything in garden was fine, instead of us being world centre stage at g8 summit in Korea. We have lost all cred in Europe also where we were highhly thought of up to now. Thanks a lot Bertie, Biffo, McCreevy,and Lenny, and still ye are there and not ran out of the country into the big waves that surfers like.
 

SideysGhost

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The wheels are rapidly coming off this week, aren't they? Yet St Lendahand in his bunker craftily dispatches stern warning messages to the Germans and insists the war will be won any day now.

It's like a cross between the Skibbereen Eagle and Comical Ali.

And so Ireland ended. As high farce.
 


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