Government was told in 2008 bank bailout would cost €16.4bn

The government was advised in 2008 it would cost €16.4 billion at most to rescue the State’s banks, a quarter of the eventual €64 billion bill for bailing out the financial system.

Merrill Lynch produced the estimate in a 45-page presentation to Department of Finance on November 18th, 2008, according to documents released by the Government after a freedom-of-information request by Sinn Féin's Pearse Doherty.

The State paid the firm €7.3 million for banking advice in 2008 and 2009. Since the estimate, taxpayers have been forced to pledge about €64 billion to rescue the banks, with the Government forced to seek aid from the EU, European Central Bank and the International Monetary Fund in 2010 as it struggled with the mounting cost of propping up the banks.

“Merrill Lynch completely underestimated the capital shortfalls within the banks, but the whole exercise was rushed after the guarantee,” Mr Doherty, finance spokesman for Sinn Féin, said in an interview. “The role of external advisers, including bank auditors, really needs to be looked at as part of the banking inquiry.”

Taoiseach Enda Kenny’s Government is preparing to hold a parliamentary committee inquiry into the banking crisis.

The then government hired Merrill Lynch to advise on options for its floundering lenders in September 2008 before introducing a guarantee of most of its banks’ liabilities, totaling about €440 billion.

Victoria Garrod, a spokeswoman for Bank of America, declined to comment. The North Carolina-based bank agreed to buy Merrill in September 2008, two months before its advice to the Government. The State's contract with Merrill ended in June 2009.

In the November 2008 presentation, Merrill estimated the recapitalization costs at between €6.5 billion and €16.4 billion. The firm weighed a series of merger options between lenders as well as the creation of a nationalised bank to wind down toxic commercial real estate loans.

The Government, under Brian Cowen, decided to set up a bad bank, known as the National Asset Management Agency, in April 2009. Banks lost about €40 billion transferring risky loans to Nama. Further bad loan losses were uncovered during two central bank stress tests in 2010 and 2011.

Merrill estimated now-defunct Anglo Irish Bank would cost €5.63 billion to rescue, a fifth of its final cost. It assumed AIB would need €5.62 billion. Within three years, the state had injected almost €21 billion into the bank, in which it now has a 99.8 per cent stake. The investment bank's €4 billion Bank of Ireland projection was near to its €4.8 billion taxpayer rescue, which has since been recouped by the Government.

Merrill’s advice was based on increasing banks’ core Tier 1 capital ratio, measure of financial strength, to 8.5 per cent. The troika demanded in 2010 that enough capital be injected into the lenders to ensure the measure remained above 10.5 per cent. AIB’s ratio stood at 15 per cent on December 31st, while Bank of Ireland had a ratio of 12.2 per cent. In addition to the state’s injection of capital, junior bank bondholders lost about €15 billion and private investors bought €3.1 billion of shares saving the financial system. (Bloomberg)