The rating agencies, Walsh said, would then downgrade Ireland’s other banks, causing a massive run.
Irish Nationwide, he said, was facing a run on three fronts. He predicted that the society would lose €2.3 billion held by overseas depositors; in addition it had debt securities in issue of €5.9 billion, which were all obtained overseas and would have to be repaid; finally, its Irish depositors were also taking money out and putting it into Northern Rock Bank, which had been guaranteed by the British government. ‘Inaction leading to collapse will be seen as a lack of leadership,’ Walsh concluded, ‘and confirm the international perception that Ireland does not know how to deal with its problems.’
The second option was an ‘orderly run off.’ In the previous year, Walsh said, the society had ‘reduced the size of its loan book by €600 million, but it was unable to do anything more. ‘In the absence of support, in the current market conditions, it is unlikely that INBS will have sufficient funding to get the time to have an orderly run-off.’ The state had to help the society, Walsh said, either by providing it with liquidity, overtly or covertly, nationalising it, merging it with another institution, or guaranteeing deposits.
Providing covert funding, Walsh said, would allow the society to keep going by secretly tapping into cash from the state. But, he said, this would not prevent the rating agencies continually downgrading the society, creating an ever greater need for more covert funding. ‘Utilising covert funding is likely to require much more money from the state than would be required if public confidence was restored.’ Overt funding, he said, while good for Irish Nationwide would have implications for everybody else, as depositors would choose to put their money with the society over other banks if it was backed by the state. ‘At its simplest if one knows one institution is safe but one is uncertain about the others then inevitably one will put one’s money with the safe institution.’
Walsh also argued against simply nationalising Irish Nationwide, because once the state did this ‘the market would begin to speculate about who would be next. ‘The threat of nationalisation of institutions is effectively a threat to wipe out the equity in those institutions. In such a position no rational investor is going to provide equity or near equity to an institution which might be nationalised.’ The nationalising of Irish Nationwide might hasten the nationalising of other banks, such as Anglo Irish, which Doyle knew was vainly hoping to go to the markets to raise more funds with which to dig itself out of the hole it had created.
‘Nationalising a single institution, in the absence of guaranteeing the deposits with the others will inevitably exacerbate the problems with the others,’ he said.
Walsh was pushing for the state to introduce a deposit or equivalent guarantee to Irish Nationwide. He described this as the ‘least disruptive option from a national perspective. It gives a clear signal from the state that it is not prepared to countenance failure and that no creditor of an Irish financial institution is at risk.’ He warned that any ambiguity about this would create problems. ‘With the state giving public comfort on the security of funds with INBS (as the smallest institution) this will inevitably imply that the state will provide similar comfort to larger institutions.’
Most analysts already assumed, Walsh said, that the state would be prepared to do this for its biggest banks. If it did this for the building society it would also have to do it for Anglo Irish or risk accelerating a run on the bank.
Walsh then looked at what he saw as the third option for the society: break-up. This would involve breaking Irish Nationwide into parts and selling them off rapidly. He argued against this, because ‘it would lead to greater value destruction and almost certainly cause wider market problems’ than running it down over a longer period. Any break-up would have to be done overnight, and nobody would be prepared to pay much for the various bits of the society in such circumstances. Worse, he added, ‘such a forced sale valuation would provide a very negative cross read to other Irish banks with property exposures.’
Walsh made his strongest argument in favour of merger with Anglo Irish. This was the plan he had already privately discussed with its chief executive, Seán FitzPatrick, a close friend for twenty years.
Anglo Irish, Walsh said, already knew many of Irish Nationwide’s clients and had the expertise to manage them. However, the bank would need a state guarantee to protect it from any negative consequences. ‘In effect the state will have to guarantee Anglo at the same time.’ He warned, however, that the other banks would kick up about such a ‘sweetheart deal’, and the state might be seen to be taking on a much bigger problem than it needed to. ‘There is a real danger that the market will not accept this as a solution unless there is an unequivocal statement from the State that it will provide whatever support is necessary to Anglo.’ Anything less might lead to ‘cynicism’ by the international markets, which instead would focus on how bad both their loan books were.
In short, Walsh was arguing that in order to save Irish Nationwide the state should take on the much heavier burden of rescuing Anglo Irish.
Having completely failed to prevent the society going mad during the boom, Walsh was now proposing that the state should be prepared to accept every risk taken not only by Irish Nationwide but also by Anglo Irish Bank. It was catastrophic advice, capable of bankrupting the entire country.
As things worsened daily, Lenihan had secretly brought in Price-Waterhouse Coopers to trawl through the balance sheets of Ireland’s banks. He wanted to know what was facing him. Unfortunately for the country, he was badly let down. From inside the bubble, nobody could see the real danger.
The government was now days away from making the disastrous decision to unconditionally guarantee the banks.
The lobbying for a bank guarantee continued unabated. On 25 September the former head of treasury at Anglo Irish Bank, Tiernan O’Mahony, met the civil servant in charge of banking, Kevin Cardiff. O’Mahony, whose debt investment vehicle ISTC had collapsed with debts of €850 million in November 2007 at the beginning of the credit crunch, said the state needed to consider some form of guarantee in order to restore confidence to the market and halt the flow of deposits. ‘Tiernan requested the meeting,’ the department said in 2012 when this meeting finally became public. ‘Kevin listened to what he had to say but that was it. He gave no indication as to government policy.’
Other meetings took place between Lenihan and senior figures in Irish business during the hectic final weeks of September 2008. These meetings were not entered in official diaries, and no notes are known to have been taken, adding yet another layer of complexity to the final days before Ireland guaranteed its banks.
Whether or not Fingleton lobbied members of the government during this time is also not known. While he was not close to Lenihan, Fingleton was both friendly with and in possession of the mobile numbers of many members of Fianna Fáil, at all levels, as well as knowing senior civil servants and other influencers.
Did Fingleton pick up the phone in the final days of September? It would be easy enough to check his phone or mobile records, but this has not been done. Like Ireland’s other bankers, Fingleton has never been asked to publicly explain what happened, and there has been no official inquiry into the events leading up to the decision to guarantee the banks.
In any event, as September ended, what Lenihan badly wanted to know was whether the suspicions he expressed to McWilliams about Ireland’s banks were correct. Were the banks totally broke, or just temporarily running out of cash?
Price-Waterhouse Coopers were already inside the country’s biggest banks, instructed to find out the answer to his question. Irish Nationwide, because it was smaller, was less of a priority.
On 27 September the accountants visited the head office of Irish Nationwide for the first time. It was a Saturday, to ensure that the arrival of a group of suited strangers with their check-lists of questions went unnoticed by nosy staff members. Fingleton was there to greet them, and calmly he assured them that his
society was in good shape. It was other banks they needed to worry about, he said, in particular Anglo Irish.
It was now three days before the bank guarantee, and the accountants simply hadn’t time to grasp the threat Irish Nationwide posed to the taxpayer. Instead, in preparing their advice for the government they partly relied on the assurances of the society’s compromised insiders, notably Michael Fingleton and his lieutenant, Stan Purcell. They also reviewed information supplied to them by professionals.
But this information was flawed. Many of the documents were prepared by KPMG and Goldman Sachs during 2007, when the world was a different place and the society was trying to look its best for a potential buyer. The information was not useless, but it didn’t drill down deep enough. It would have been impossible to really get to grips with the society in such a short time. It had a poor IT system and stored its files badly, making it hard to see what it was really like. The failure by the Financial Regulator to make the society address these issues over the decades allowed this situation to continue. At the moment when Ireland was most vulnerable, it was making crucial decisions in the dark.
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Late on the night of 29 September 2008 the government took the decision to give a blanket guarantee to the entire banking system, at a cost of some €440 billion.
Earlier the heads of the country’s two biggest banks, AIB and Bank of Ireland, had pressed for the state to guarantee their liabilities and also to nationalise Anglo Irish and possibly Irish Nationwide. According to a detailed account of the night’s events by the Sunday Business Post, Cowen’s response was, ‘We’re not fucking nationalising Anglo.’
Once the decision not to take out Anglo Irish was made, Irish Nationwide too, by the logic of the time, was in the clear. The two banks were so similar that to say that Irish Nationwide alone was doomed would have caused the market to desert Anglo Irish, as the obvious one next in line to fall.
A guarantee had been only one of the options given to the government by its advisers Merrill Lynch, who warned that such a decision threatened the ability of the sovereign to pay for itself. However, that was the course the government chose that fateful night.
In a press statement the Department of Finance said:
The decision has been taken by [the] Government to remove any uncertainty on the part of counterparties and customers of the six credit institutions. The Government’s objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy.
This very important initiative by the Government is designed to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets.
The decision not to look harder at Irish Nationwide would prove to be a very expensive decision made by Cowen’s inept and shell-shocked government. Within a year the guarantee, designed to safeguard the banking system, would bankrupt the country. Immediately after the announcement, however, Irish bankers were euphoric. They had been saved.
Fingleton’s son Michael junior was among the first to jump up and down, in the process creating a diplomatic incident. On 2 October an e-mail message from Fingleton junior emerged on the internet, which was picked up soon afterwards by the Financial Times. It had been sent from the society’s London office to a friend in an unnamed large investment bank, touting for deposits.
As Irish Nationwide qualifies under this scheme we now represent the safest place to deposit money in Europe with a AAA guarantee from a country with the lowest national debt to GDP ratio of any AAA country.
Please, be so kind, as to pass on to friends, colleagues and clients as you see fit. Should you have any queries, please do not hesitate to contact me directly.
A furious British Prime Minister, Gordon Brown, contacted Cowen to voice his concern. ‘Downing Street wants to avoid a public row,’ the Financial Times reported, ‘but officials say Mr Brown is determined “to restrict the inflows into these Irish institutions”.’
Lenihan tried to defuse the situation by issuing a strongly worded statement. ‘The Minister has said that he will have no tolerance for any financial institution which seeks to exploit competitive advantage from this guarantee. The Minster had not yet entered into a contract with the institution in question.’
The implication was clear: Lenihan was threatening Irish Nationwide that he would leave it out of the bank guarantee if it did not apologise. An apology was quickly forthcoming.
On 7 October the Financial Regulator fined Irish Nationwide €50,000 for sending out the message. ‘Irish Nationwide failed to act professionally and with due regard to the integrity of the market,’ the regulator said. It was the first time the regulator had fined a bank since the agency was set up in 2003. It was both a seismic and an absurd moment: an action by a Fingleton had been punished—but only for sending an indiscreet e-mail message.
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On 13 October 2008 Price-Waterhouse Coopers were back inside the society, this time for a deeper dig. They took three weeks to review the society, which by now had been guaranteed by the state. They visited both its head office in Grand Parade, Dublin, and its Northern Ireland office on the Ormeau Road, Belfast. The code-name for the project was ‘Canal.’
Meetings were held with Michael Fingleton, Stan Purcell, Darragh Daly (credit risk manager), Tom McMenamin (commercial lending manager for Ireland) and Gary McCollum (head of UK credit risk), as well as other members of the society’s senior management, such as it was. Notably absent was the society’s chairman, Michael Walsh.
The meetings were positive: the ‘Canal’ was bearing up well in the global economic storm, the accountants were assured. They told the government, however, that it was Fingleton and his men who were guiding them around in the the darkness of the society’s lending engine-room. In its ‘strictly private and confidential report’ it stated:
Our information was obtained primarily from the management completed templates [explaining how the society was doing], 30 September 2008 management accounts and discussions with management / loan officers.
In addition we reviewed a sample of loan files.
We checked a sample … No major issues arose from our review of the sample.
This wasn’t surprising. The society had provided the sample, so naturally the worst of its excess and madness lay hidden away.
Then came yet another pile of qualifications, designed to protect Price-Waterhouse Coopers from their failure to spot how toxic the society was. ‘The building society is a complex business which produces a substantial amount of financial information for internal and entity reporting requirements. As a result of the time taken to undertake our review we have not been able to review all the relevant financial management available at 30 September 2008.’ In other words, they were admitting that Irish Nationwide couldn’t get it together to provide them with up-to-date information. ‘We note that we have undertaken only a high level review of the September 2008 balance sheet. We have not been able in the time available to us to check all the underlying documentation, the adequacy of security, valuation reporting etc.’
In short, the accountants hadn’t really looked at what would have been a major problem for the society, even if the property market had never crashed. Its lax and negligent approach to lending made it a disaster waiting to happen, no matter what occurred overseas.
For good measure, Price-Waterhouse Coopers added that they hadn’t looked at some of the other issues that would later dog the society, including, most notably, ‘regulatory matters.’ The whole thing was too rushed. There wasn’t time to delve deeper into potential problems in any of the banks. The review should have taken place a year earlier, when the credit crunch began internationally. This would have been long before the guarantee was introduced.
‘We have shown a draft of this report to Michael Fingleton (Chief executive) and Stan Purcell (finance director),’ they
reported, ‘who have confirmed to the best of their knowledge and belief [that] it does not contain any material error of fact, there has been no material omission and it fairly sets out the results, state of affairs and prospects of the society.’ Based on the information from Fingleton and his pals, they argued that the society might have had problems but its balance sheet was strong enough to make it bomb-proof.
Under ‘all capital scenarios,’ Irish Nationwide’s tier 1 capital—the core ratio for measuring its financial strength—‘remains in excess of 9% in all years with the exception of 2008.’ For 2008 they said that tier 1 capital would slip back slightly to 8.3 per cent, reflecting the tough market, but this would still give the society one of the strongest balance sheets in the country.
Buried in the report, however, were some startling admissions that should have set alarm bells ringing. As so often before, they didn’t.
The society faced a huge concentration risk, as it had allowed a small number of people to run out of control with their borrowings. In September 2008 the society’s commercial loan book was €9½ billion, the report said, with about €3 billion of this managed by Fingleton from Dublin and €6½ billion handled by McCollum and his five-person team in Belfast. The numbers were scary and staggering when stripped of Price-Waterhouse Coopers’ cold prose. For example, €5.6 billion of the society’s lending was for land or development—and of this, €2.3 billion related to sites that had not even obtained planning permission.
Irish Nationwide wasn’t even very Irish any more: it had pumped €5.4 billion into Britain, or 46 per cent of its total loan book. (It was a good thing in a way that it wasn’t entirely bogged down in Ireland’s shockingly overheated property market; but in other ways it could be seen that much of Irish Nationwide’s bad lending was in Britain. If this had been allowed to collapse it would have been Britain’s problem, not that of Irish citizens.)
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