It was just after 6pm last Monday, following a day of absolute turmoil on the Irish stock exchange. Taoiseach Brian Cowen, in his impressive oak-lined office in Government Buildings, took a call from AIB CEO Eugene Sheehy and Bank of Ireland CEO Brian Goggin – two of the best paid and most senior bankers in the country, who told him starkly: "We have a major problem."
The problem they spoke of was a crisis in liquidity and confidence in the Irish banking sector. The bankers – backed by the governor of the Central Bank – were calling on the Government to urgently bail them out, even though some of them had been utterly reckless in their trading.
The events of last week are unprecedented in the recent history of the State. Bank bailouts, emergency legislation, crisis meetings, cabinet votes taken over the phone in the middle of the night, overnight parliamentary sessions, unanswered questions and international rancour at our unilateral action – all in the space of 48 hours.
This saga began early last month when officials at the Department of Finance, the Central Bank and the National Treasury Management Agency met amid growing concern about the stability of the Irish banking system.
Due to overexposure to the collapsed property sector, and the international credit crisis, Irish banks were finding it very tough to raise money. A sharp 60 per cent drop in their share prices in less than a year reflected this. The Government, on foot of recommendations from the Central Bank, felt it needed a contingency plan in case an Irish bank was to go to the wall.
Move forward to Brian Cowen’s visit to the United States, in the wake of the collapse of Lehman brothers. He was confronted first-hand by the stark reality of a major bank going under. Senior sources said that, on his return, he called in his own officials and Department of Finance personnel, and instructed them to get a plan together, and quickly.
Last weekend, as the papers here were full of coverage of the pending Budget, and as Bradford and Bingley bank was being nationalised in Britain, and politicians in Washington edged closer to a $700bn bailout deal, officials here were working late into the night on that plan. When they awoke last Monday morning, none of them expected the 72 hours they had ahead of them.
Given the recent turmoil in banking, and the introduction of the €100,000 State deposit guarantee, regular meetings were taking place between the Government, the Central Bank, Financial Regulator Patrick Neary, and senior management of the banks. Such a meeting took place early last Monday at the Central Bank.
Present were several of the CEOs, including AIB’s Eugene Sheehy, Bank of Ireland’s Brian Goggin, Fergus Murphy of the EBS and senior officials from Brian Lenihan’s Finance Department.
The banks made it very clear how shaky the liquidity position was. Sources close to the meeting said the phrase “tipping point” was used heavily, and finance officials were made aware of how close at least one bank was to going under. Nationalisation was discussed, but it was felt that the danger did not merit that. It was also made clear, that the Budget was the key priority for the next three weeks and any plan would have to wait.
But events on Monday changed all that, very quickly. Firstly the Irish stock market suffered its worst day since January 5, 1983, dropping a record 13 per cent. The banks were the worst affected. Anglo Irish’s share price dropped by 46.2 per cent, while Irish Life and Permanent fell 37 per cent. Then came the rejection of the US bailout package by the House of Representatives, prompting a sharp drop in the US stock markets, which suffered the worst losses since the October 1987 crash. The Dow Jones recorded its biggest one-day drop ever.
Things were bad, very bad and action was needed immediately, the banks said.
Shortly after the markets closed, AIB CEO Eugene Sheehy and Bank of Ireland CEO Brian Goggin called Brian Cowen’s office.
They warned that the Irish banks couldn’t sustain another day like they just had on the markets, and they needed a protection plan overnight. It has also emerged that the Central Bank considered the option of nationalisation but this was resisted by the banks, thus adding to the crisis.
A call was also made from the governor of the Central Bank, John Hurley, to Finance Minister Brian Lenihan – who later claimed the bold guarantee ahead was prompted by his belief that the entire “house of cards” that is the banking system was about to collapse.
**Events on the stock market and in the US had brought the crisis to a head and the Irish banking system was seriously threatened – because there wasn’t enough money for at least one of the banks to meet their cash flow needs.
"At that time, I had to inform the Minister that the risks to financial stability were becoming unacceptably high with knock-on effects for the wider economy," Mr Hurley said later.
At 8pm on Monday, Brian Cowen summoned Brian Lenihan and they discussed how best to move forward. Very soon after, senior officials from the Central Bank – including John Hurley and the bank’s director general Tony Grimes, the Financial Regulator Patrick Neary, and core finance people from Brian Lenihan’s team, gathered at Government Buildings. The Attorney General Paul Gallagher SC also arrived.
The Taoiseach’s top advisor, Joe Lennon, economics advisor, Peter Clinch, and Government press spokesman Eoin O Neachtain were also in attendance.
The officials split up into sub-groups to discuss specific issues, and were told by Brian Cowen to present him with a range of options which the Government could choose from. Interestingly, it has emerged that the option chosen could have been the inspiration of an outside figure. Senior government sources have said the suggestion came from JP McManus, while Dermot Desmond’s name has also been associated with the plan. David McWilliams has led the charge to claim the credit for it, much to the ire of Lenihan and his officials.
However, even more intriguing is the confirmation this weekend that former Irish finance minister and now EU Commissioner Charlie McCreevy played a role in the formulation of the plan.
The initiative announced last Tuesday morning bears the hallmarks of a Charlie McCreevy masterstroke – and it is no coincidence that he was confirmed to have played some part in its development.
Amid the backdrop of the mounting financial crisis, Lenihan met McCreevy in Nice during last month’s gathering of Europe’s finance ministers and the pair had a “long discussion” about the various contingency plans that were being explored by the Government.
According to senior government sources, McCreevy was also in regular contact with his former cabinet colleagues during the process, and was the first EU Commissioner to be told of the Irish decision to go ahead with the guarantee plan.
Shortly before 10pm on Monday, the Cabinet’s secretariat began contacting members to inform them of what was going on.
At about the same time, AIB chairman Dermot Gleeson and chief executive Eugene Sheehy, along with Bank of Ireland chairman Richard Burrows and chief executive Brian Goggin, arrived at the Taoiseach’s department for a face-to-face crisis meeting. They were led to the Sycamore Room and were left to stew as Cowen and team discussed policy.
Speaking to the Sunday Independent, Brian Lenihan said: "We had substantial discussions ourselves, the Taoiseach, myself, the governor of the Central Bank before we met the banks.
“They came to the room and we heard what they had to say, and we asked them to leave the room. It’s very important when representations are being made to you – by whatever source – that policy is not discussed with them.”
**The chief executives of the other four financial institutions which would eventually be covered by the guarantee, didn’t know about the meeting until very late. They were merely contacted about what was going on.
EBS chief executive Fergus Murphy and other senior management were actually on their way to a function in Donegal on Monday evening when they heard about what was going on.
“They could hardly complain, could they, about what was happening – especially the likes of Anglo and Irish Life and Permanent – given the day that they had had on Monday. They were the beggars at the feast,” one senior Government source said.
As midnight passed, Mr Sheehy and Mr Goggin were brought in and informed of which option the Government intended on taking – the system-wide €400bn guarantee of all deposits, bonds and debts owed by AIB, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and the EBS.
“They were told, in no uncertain terms, that this was not a free pass, and that the Government would be insisting on hard assurances in order to stand over the guarantee,” according to the senior source.
For over an hour, specific legal, public relations and operational matters were hammered out before Goggin and Sheehy left the department to go home.
**Despite it being almost 1.30am, officials – led by Department of Finance Secretary General David Doyle and his deputy Kevin Cardiff – continued to tweak the intended press statement, and began drafting the relevant Bill for the pending Dail and Seanad debates later that day.
It was at this stage that the incorporeal cabinet meeting took place, which means that cabinet ministers were contacted by phone and asked to vote for or against the plan.
**It has emerged that, while the majority voted in favour of the plan, several ministers voiced concerns and asked for more details.
With the cabinet vote sealed, the Taoiseach and the Finance Minister left for home for some sleep. It was at this stage that the first official contact was made with the EU. Lenihan arrived back in the department at about 6am, and the first thing he did was make a call to Jean Claude Juncker, chairman of the Eurogroup, to inform him officially of the Irish decision. He also made calls to Enda Kenny and Eamon Gilmore to inform them of what was going on.
As the country awoke, unaware of the night’s drama, Lenihan addressed a hastily arranged press conference, announcing to the country and to the world that Ireland had taken this drastic step to safeguard the Irish banking sector.
The nation’s media quickly sought to get a handle on what exactly the guarantee meant, and Europe quickly gave its damning verdict on Ireland’s unilateral move.
Some of Europe’s top politicians, including French Finance Minister Christine Lagarde were furious with Ireland for going it alone – as was British Prime Minister Gordon Brown’s government.
The Cabinet met on Tuesday afternoon for an extended discussion on the guarantee, before the shambolic start to the debate in the Dail on Tuesday night. For various reasons, the debate was delayed four times and the opposition were furious that they were only given 15 minutes to view the plan before the debate. Brian Cowen strongly defended the move in the Dail, which sat until 11.40pm and adjourned until the following morning.
The move certainly had an impact on the stock market as it rebounded by 8 per cent on Tuesday. Brian Cowen was not in the Dail when proceedings recommenced on Wednesday morning. He was in France meeting President Nicholas Sarkozy, and would later report that his new friend supported the move.
He was back in time for the final round of debate, which ran late into the night. Leinster House was a hive of activity like it hasn’t seen since the several heaves against Charlie Haughey in the Eighties. Electricity was in the air and TDs and senators from all parties seemed to revel in the novelty of the occasion. As one senior Fianna Fail TD said: “There’s nothing like the smell of a crisis to get the adrenaline going”.
Brian Lenihan told the Dail during the debate: “There is understandable concern that the Exchequer is potentially significantly exposed by this measure. I want to reassure the Irish people that this is not the case. The risk of any potential financial exposure from this decision is significantly mitigated by a very substantial buffer made up of the equity and other risk capital.”
The Dail bar was buzzing, but as news deadlines came and went, the number of hacks began to dwindle down to the hardcore team who were prepared to stay with it until the very end.
Shortly after 2am on Thursday morning, the Dail overwhelmingly passed the bill, by 124 votes to 18, after a number of changes had been made. Fine Gael, despite having some concerns, voted en bloc with the Government, while Labour voted against it on a point of principle.
Fine Gael was exposed badly on this. While Richard Bruton may have known what this was all about, many others on the FG front bench, including the dangerously quiet Enda Kenny, were not so solid. Tom Hayes, the party chairman said his party was prepared to “trust the Government” and supported the deal in the national interest.
In contrast, Eamon Gilmore, Labour leader said too many questions hadn’t been answered and it was not acceptable to support something when they were being asked to vote blind.
He said: "What is the full extent of the exposure of the Irish taxpayer? What will the banks pay for this cover? What will the impact be on the cost of borrowing by the Irish Government, with further knock-on consequences for the Irish taxpayer?
“We did not get satisfactory answers to those questions on Tuesday. We did not get them during the Dail debate. And we still have not got them – even with the legislation now passed. As I said on Tuesday morning, the Labour Party was not opposed to action being taken to rescue the banking system. Now that the guarantee has been given, I hope it works.”
Things then moved on to the upper house for debate, which began just after 2.30am, with Lenihan present. One of his cabinet colleagues said: “He’s had a rough few months, but this allows him a chance to show his qualities. Just look at him tonight, he’s revelling in the storm.”
**Immediate reaction to the move was mixed. On radio, the next day, Colm McCarthy, UCD economist said that the Government was punishing the prudent banks and rewarding the reckless, and speculated that one of the lucky six could now have negative capital.
He said: "What the Irish Government has done is written a blank cheque for double the country’s GNP. No bank has been deemed sufficiently reckless as so to be told to go off and fail. Every bank is being treated the same. One of those six banks in my opinion has been very prudent over the years, one wildly imprudent – but both are equally wonderful in the eyes of the Government.
**“This could cost an awful lot of money. The stock markets are saying the banks have lost an awful lot of their capital and the share prices of the banks are a quarter of what they were a year ago. It is entirely likely that one of the banks could have negative capital.”
It has emerged, meanwhile, that Lenihan had also received two phone calls from his British counterpart Alistair Darling on Wednesday, who pleaded for the Government to think twice and later to do something to prevent a run of money to the Irish banks based in the UK. It also emerged that Gordon Brown made calls to the president of the European Commission, Jose Manuel Barroso, in disgust at the Irish move.
Pressure was also brought to bear on Lenihan to extend the guarantee to the foreign banks based here, also to ensure they don’t experience a run. Bank of Scotland, National Irish and Ulster Bank applied for inclusion in the scheme, and Lenihan said he would consider all applications.
By late Thursday, a relative calm had been restored, but the focus of the guarantee had turned to the likely cost of it to the banks.
“Everyone is waiting to see what form the guarantee will take, the devil is in the detail as they say, so we must wait and see,” one senior bank source said.
**It was confirmed by the Sunday Independent that several of the more prudent banks, like the EBS and Irish Permanent, were applying for individual deals, partly because they felt they did not want to be penalised by the more reckless elements in Irish banking.
It also emerged on Thursday that Michael Ahern, chairman of the Oireachtas Finance Committee, is to call the heads of the banks back to Leinster House to explain themselves.
“We need to discuss how the current banking situation came about and how things changed since our previous meeting. We also need to get some assurances and detailed answers from the banks on how they plan to proceed in light of the Government guarantee.”
By Friday, the short term joy of getting one over on the Eurocrats and the British was replaced by the fingering of blame as to how this crisis came about. There was increased pressure on the Financial Regulator Patrick Neary – and many felt his dismissive performance on RTE’s Prime Time did little to relieve the pressure on him. There was mounting criticism from the opposition and within government circles about his role.
It also emerged on Friday that Michael Fingleton Jnr, the son of Irish Nationwide boss Michael Fingleton Snr, had sent out a predatory email touting for business in the UK on the back of the Irish government guarantee.
He was widely criticised by all sides, including the Taoiseach, who said it was “unacceptable.”
There were mounting calls for him to be removed from his position.
In almost perfect symmetry, the US House of Representatives finally passed a watered down version of the bailout package late on Friday, which is expected to greatly relieve concerns on the international markets.
Attention now moves to what form this Irish deal will take, and Brian Lenihan is correct: we are in the eye of the storm, and this is only the beginning of the reform.
The guarantee was not the silver bullet or panacea to Ireland’s financial problems, but it allows time for the greedy bankers to get their houses in order.