by Shane Ross
The combined wisdom of Ireland’s top politicians and civil servants quickly settled on the cleanest choice. The government would guarantee all the liabilities – the customer and interbank deposits, and also the vast majority of bonds – of the six Irish banks. This solution had already been canvassed by David McWilliams and Dermot Desmond.
The four bankers were recalled to be told of the decision and asked to ‘reflect’ on it. There would, naturally, be strings attached to the guarantee, but the finer detail would be agreed later. Legislation was already being drafted by bleary-eyed civil servants. AIB’s Gleeson and Sheehy were dispatched back to the Sycamore Room while Bank of Ireland’s Burrows and Goggin were given their own privacy in the dining room. All four made telephone calls to senior staff so that they’d know about the new regime when the banks opened in a matter of hours.
Department of Finance officials and the Financial Regulator meanwhile made frantic telephone calls to the chairmen of the other four Irish banks – Anglo, Irish Life & Permanent, EBS and Irish Nationwide – to convey the news.
Reaching the chairmen was not the easiest task. Sean FitzPatrick could not be roused from his slumber, so the department settled for his chief executive, David Drumm.
Michael Fingleton, the legendary boss of Irish Nationwide, had been aware of the unfolding drama at Government Buildings as early as seven in the evening. Fingleton knew nothing of the all-night drama until he was phoned at home by his chairman, Professor Michael Walsh, at 7.30 in the morning. Walsh had been woken by a call from the Financial Regulator at 3 a.m. but saw no reason to disturb the longest-serving warhorse in the Irish banking business before the sun was up.
Patrick Neary reached EBS boss Mark Moran at around 2.30 a.m. Moran immediately rang his own chief executive, Fergus Murphy, who was only just back in bed at his Enniskerry, Co. Wicklow, home, having driven through the night from Donegal after holding an EBS members’ meeting in the north-west. Murphy had heard rumours of dramatic action all day Monday but was relatively unperturbed as the outflow of deposits from EBS had been modest.
The decision was made; but the formalities still needed observing. Most members of the Cabinet were asleep, many unaware that they might be woken to ratify a historic deal between the Irish taxpayer and the tottering banks. An ‘incorporeal’ cabinet meeting was convened via conference call. Foreign Minister Micheál Martin was thousands of miles away in Newark, New Jersey; but he was far easier to contact than Green Party leader John Gormley, enjoying a deep sleep at his Irishtown home only two miles down the road. Gormley, a man notoriously keen on an early bed, had allowed his mobile to run out of juice. So the Minister for the Environment had to be woken by Gardaí and told to ring in to the cabinet meeting. Both he and his Green colleague in Cabinet, Eamon Ryan, readily agreed to the guarantee plan: Gormley had urged the guarantee route to Lenihan only a few days earlier.
Social and Family Affairs Minister Mary Hanafin had been on RTÉ’s Questions and Answers that night, having been forewarned that the banking topic was a minefield because ‘something was going to happen’. Any answer she gave could have been overtaken by events. She acquitted herself skilfully. As she left RTÉ, Hanafin received a midnight telephone call telling her to be on standby. She went to bed and was woken at 2.45 a.m. for the cabinet meeting. She did the business from her bed. Agriculture Minister Brendan Smith had spent the day in Brussels and returned late at night to be told that he might be required for a call later on. The Cavan-based minister also performed his affairs of state in his pyjamas from his brother’s residence in Dublin. Cabinet secretary Dermot McCarthy briefed the politicians on the pending measures and took a few questions. The most important cabinet meeting for decades lasted less than thirty minutes. Lenihan was given the go-ahead to clear the next obstacles.
At 3.30 a.m. the four bankers left. They had put the gun to the government’s head and the ministers had delivered. The markets would welcome the decisiveness and determination of the Irish government; better still, their own jobs were not threatened. It was round one to the bankers.
At 4 a.m. Brian Cowen suggested that Lenihan take a couple of hours’ rest. The Finance Minister headed home for a brief sleep.
He resurfaced at 6 a.m., just about the time that Sean FitzPatrick was being woken from his slumbers by Anglo chief executive David Drumm with news of the overnight drama. Back in the office, Lenihan moved quickly to cover a few danger zones. As France held the EU presidency, he rang French Finance Minister Christine Lagarde, to tell her of the Cabinet’s decision. Simultaneously, Central Bank governor John Hurley contacted European Central Bank president Jean-Claude Trichet.
Even as Lenihan briefed his European colleagues, the finishing touches were being put on the formal announcement. The message from Ireland was clear: the basic decision to give the guarantee was not reversible; the Irish government was not for turning. This was a high-risk strategy for Ireland in its dealings with Europe, given the political tensions created by the country’s rejection of the Lisbon Treaty.
On the home front, Cowen and Lenihan needed the support of the political Opposition, the media and the people of Ireland. Just before 6.45 a.m. Lenihan released a dramatic statement. The financial world awoke to the news that Ireland had embarked on a solo run, giving a government guarantee over the deposits and loans of all its banks. Lenihan decided to brave the country’s most influential radio programme, RTÉ’s Morning Ireland. He assured the state’s small savers that their deposits were safe.
British Chancellor of the Exchequer Alistair Darling would pick up the telephone twice over the coming days to bawl out Brian Lenihan over the move. Darling told Lenihan that the guarantee was a threat to British banks already under severe pressure. He anticipated a flow of money from the UK to Ireland. The Chancellor demanded that the guarantee be dropped or, failing that, be extended to British banks operating in Ireland. These included Ulster Bank and Bank of Scotland (Ireland). Darling’s calls followed two dramatic protests from Royal Bank of Scotland chief Sir Fred ‘The Shred’ Goodwin – one directed to the heir to the throne, Prince Charles (Goodwin was chairman of the Prince’s Trust), and the other to British Prime Minister Gordon Brown. Brown rang Brian Cowen with the same message, again seeking protection for UK banks in Ireland. Neither Taoiseach nor Minister for Finance was tactless enough to mention that the UK had itself given a government guarantee to Northern Rock depositors when it collapsed twelve months earlier. If one nation’s guarantee was uncompetitive, surely the same charge could be made against the other’s?
International investors were initially impressed by a Lenihan tour de force. The government guarantee provided the necessary short-term relief. Money poured back into Irish banks. The exposure of the taxpayer to a €440 billion liability was hardly mentioned in the immediate aftermath, so relieved was the nation at its escape from disaster. The government was already lengths ahead in the media battle. Little opposition was emerging. Generally, commentators felt that the ‘least worst’ solution had been found.
Lenihan shrewdly moved quickly to square a possible critic. Fine Gael leader Enda Kenny was in the studio for an early morning TV3 interview when the minister rang, seeking his support in the national interest. Kenny says that he readily agreed ‘in principle’. Within seconds he was live on the air answering questions about his party’s attitude to the emergency. He took the line of responsible opposition, insisting that Fine Gael would not be found wanting if the banking system was in danger of collapse.
It was the line that Fine Gael held throughout the political chaos that followed in the next forty-eight hours.
Labour leader Eamon Gilmore was not so accommodating. He told me that he took Lenihan’s call at home, responding that he would reserve his position pending the supplying of details, but would be ‘mindful of the national interest’. Later that day the Labour Party opted to oppose the bill, much to the anger of the government; but many of the strongest lobby groups stood behind the guarantee. Father Se
an Healy of the Conference of Religious in Ireland, the St Vincent de Paul and Age Action were all quick out of the traps to support Lenihan.
The same evening, as the government struggled with the drafting of the new law and political tempers began to fray, an impatient Kenny was to brand the procedures ‘a shambles’.
The markets delivered a positive verdict on the guarantee. Shares in Anglo, by far the biggest loser when the markets hit meltdown on Monday, shot up 30 cents to €2.60 at the opening, and constant buying throughout the day lifted them to €3.84, for a gain of over 60 per cent. Irish Life & Permanent added 35 per cent before the close, Bank of Ireland a more modest 21 per cent and AIB 18 per cent.
Monday’s savage losses had been recouped. Sighs of relief were heard in the boardrooms of Irish banks, the Central Bank, the Department of Finance and the Cabinet. The strategy had worked. The crisis was sorted. Brian Goggin, Eugene Sheehy and the other big bankers could join Sean FitzPatrick in a night of uninterrupted sleep on Tuesday.
Or was it a false dawn?
There were already ominous signs that all the original participants in the crisis meetings were frantically spinning an incomplete story. Indeed it is possible that they had swallowed their own propaganda. The seeds of self-delusion were buried in the last sentence of the 6.45 a.m. press release. It peddled a mantra so absolutist that it nearly became accepted as the unvarnished truth. The assertion that the government guarantee was given to ‘remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets’ was a convenient cover. Blaming the outside world suited all the players. Bankers, property developers, regulators, politicians and civil servants had joined forces to ram home the same message. United, they were exonerated. And now that the crisis was over they began to dream that maybe they could resume business as usual.
The truth was that while the turmoil in the international financial markets had certainly caused disruption for Irish banks, the root cause of the Irish crisis was home-grown. It was to emerge soon enough.
The legislation establishing the bank guarantee was an astonishing package giving huge powers to the Minister for Finance. Most controversial was the decision to throw competition law to the wolves and allow him to merge banks together at will. It promised ‘financial support’ to those in need for two years. It allowed the state to take shares in the institutions. The detailed terms of the guarantee were as yet unspecified.
Opening the Dáil debate over the guarantee legislation on Tuesday night, a tired but energized Lenihan painted the predictable picture of ‘unprecedented disruption in international financial markets’ and the ‘extended international credit crunch’. He did a whirlwind tour of the world, calling the British, European and US problems in as cover. Offstage the bankers, property developers, regulators and builders must have been cheering. The mandarins must have been in ecstasy.
Fine Gael finance spokesman Richard Bruton spoke of the government’s ‘dangerous flirtations with the property sector’ and criticized the Taoiseach’s constant refrain that ‘the fundamentals are sound’. Otherwise he made eminently sensible suggestions about additions to the bill to protect the taxpayer. Labour Party finance spokeswoman Joan Burton took a tougher line, making it clear that her party was not going to give the government and the bankers a free run in the Dáil. Nor was she about to allow Lenihan, a constituency rival in Dublin West, to emerge as a national hero. She turned the argument away from the global crisis back to the behaviour of our bankers at home. She thundered that there should be limitations on bankers’ pay written into the guarantee scheme and that none should be paid more than the Taoiseach. She attacked ‘the tax breaks that fuelled the speculative bubble’ and insisted that the entire price should not be ‘dumped on the taxpayer’. The argument began to turn away from the global tidal wave of collapses, back to the FitzPatricks, the Goggins, the Sheehys and the Fingletons. She was not giving the government an inch. Although the bill was likely to win the support of the main opposition parties, Lenihan’s hopes of all-party support for his handling of the crisis were shattered.
Meanwhile, a stone’s throw away from Leinster House, three of Ireland’s banks were cooking the books as 30 September drew to a close.
The last day of September happened to be the year-end date for Anglo Irish Bank’s annual accounts. Although few knew it at the time, Sean FitzPatrick had been dancing rings around Anglo’s accounts. He had borrowed as much as €122 million of unreported loans from Anglo at various points over the previous eight years. His gigantic borrowings never appeared under the ‘directors’ loans’ figures in the annual report. Nor anywhere else. Each year, as 30 September approached, Sean had whipped the loan away from Anglo and transferred it to the Irish Nationwide. He left the loan there for a few weeks before returning it to Anglo. News of such unorthodox activity had never reached the media.
As politicians debated the health of Ireland’s banks in the Dáil, they were blissfully unaware that they had been misled by at least one of the banks they were bailing out. The chairman and unchallenged supremo of Anglo had deliberately concealed the extent of his loans from shareholders and from all independent judges of its health. The bank’s auditors, Ernst & Young, had never cried ‘Foul’; they would later claim that they’d never noticed the concealment.
FitzPatrick’s activities were not a one-off. A second, lethal skeleton was buried in the Anglo cupboard. Elsewhere in the same set of accounts an even more spectacular stroke was about to be pulled – and safely disguised from the eyes of shareholders.
It had always been suspected in the days before the year-end date (and the panic in Government Buildings) that there had been a heavy run on Anglo’s deposits. Anglo had denied any serious impact, but rumours of big withdrawals persisted.
The rumours were spot on. Anglo rightly believed that if the truth was revealed to shareholders in the year-end report, there could be panic, further withdrawals and the destruction of an already battered share price. So Anglo contrived an audacious scam that would leave Sean FitzPatrick’s hidden loans wheeze in the shade. Anglo sought a deposit of €7.5 billion from Irish Life & Permanent to cover up the haemorrhaging of Anglo’s deposits. Their friends in the rival bank agreed to help, but first they demanded the money from Anglo in another form. A circular movement was devised allowing IL&P to take the money as an interbank deposit and return it to Anglo as a customer deposit. The run on the bank was disguised. Anglo’s customer deposit base had been artificially inflated for the accounts.
On Wednesday morning an exhausted Taoiseach headed for Paris to butter up President Sarkozy. Cowen was in double trouble in Europe. The rejection of the Lisbon Treaty was bad enough. Cocking a second snook at our European colleagues with a unilateral bank guarantee was possibly a bridge too far.
On the surface the visit went well, but Cowen was reported to be none too pleased when he jetted into Dublin that evening to find the guarantee Bill still languishing in the Dáil. He had wanted it passed through both houses by Wednesday midnight.
Meanwhile the Senate had been on standby all day. Senate leader Donie Cassidy was pacifying an increasingly irritated flock of Fianna Fáil troops waiting for the Dáil to finish. The bars and self-service restaurant in Leinster House stayed open late to facilitate an all-night sitting.
The Dáil finished at 2.10 a.m. on Thursday. Green Party leader John Gormley, who had snatched a few minutes’ sleep on a pull-out sofa in Lenihan’s office, was woken to vote. The bill was finally passed by 124 votes to 18.
The bill sped straight to the Senate. The Upper House took nearly six hours to pass the legislation. A few technical changes were made. They were returned to the Dáil for approval. During the afternoon the bill headed by bike to Áras an Uachtaráin in the Phoenix Park for an early signature from President Mary McAleese. It was law by dusk.
Ireland’s banks were saved. But were its bankers?
As Sean FitzPatrick, Brian Goggin, Eugene Sheehy, Fergu
s Murphy, Denis Casey and Michael Fingleton surveyed the situation at the end of the week they must have been smiling. The first miracle was that they were all still in position; their fat salaries were intact. Admittedly, there was the nasty business of the detailed terms of the bank guarantee to be thrashed out, but on balance they were well ahead. The government was on the bankers’ hook. The state had underwritten their past and future behaviour. Better still, they and Lenihan were telling the same story. The government had held to the bankers’ line in the Dáil debate. The run-up to 30 September had been a catalogue of financial calamities throughout the world. Ireland was a victim. Most of the Irish media was on board.
Mindful that the sensitive conditions of the bank guarantee still needed to be negotiated with government, the bankers kept their heads down. This was no time to claim victory. They had got out of jail. Diplomacy was essential.
Sean FitzPatrick, however, was no diplomat, and Seanie fancied himself for an outing on one of Ireland’s most popular radio programmes. On the morning of Saturday 4 October he headed in to RTÉ’s Donnybrook studios for an interview with Marian Finucane.
He blew it. In style.
Brian Goggin, Eugene Sheehy and Michael Fingleton must have been shuddering as they tuned in at their South Dublin homes. Everyone knew Seanie was a loose cannon.
He gave the now ritual line about the ‘global wholesale markets’ being the problem and maintained that it wasn’t ‘a creation of Irish bankers that this had occurred’. He did self-exoneration well.
So far so good. It was when Marian Finucane began to ask him about the Financial Regulator that he shifted on to shakier ground. Seanie graciously gave Patrick Neary the Sean FitzPatrick clean bill of health: ‘Well, he regulates very closely and gets all the information that he wishes to get in relation to our lending, in relation to our liquidity, in relation to our deposits. Another thing, he comes in, because, internal audits, he looks at the top twenty loans, forty loans. He gets information about various ratios.’
