Lenihan warned over blanket guarantees

GUARANTEE WARNING:THE FORMER governor of the Central Bank told the Minister for Finance that an "all deposits" guarantee would potentially be counter-productive and warned against its implementation less than two weeks before the Government introduced the blanket guarantee scheme on September 30th, 2008.

At a meeting on September 18th, John Hurley warned that liquidity in the banking sector was under “great strain” and something needed to be implemented quickly.

Mr Hurley proposed that the deposit guarantee scheme be increased to €100,000 – a move implemented by the Minister two days later. However, he advised against the introduction of a blanket guarantee scheme, instead advising that a €10 billion emergency fund should be available as a liquidity provision structure in the event of a “pressure scenario”.

The meeting was attended by the Minister for Finance, officials from the Department of Finance, the NTMA, the Central Bank and the Financial Regulator’s office.

Michael Somers, Brendan McDonagh and John Corrigan were there from the NTMA; Patrick Neary and Jim Farrell attended from the Financial Regulator’s office; John Hurley, Tony Grimes and Brian Halpin represented the Central Bank and Financial Services Authority, while two representatives from the Department of Finance, Kevin Cardiff and David Doyle, were also in attendance.

In relation to Anglo Irish Bank, Mr Hurley advised that if its troubles continued, the Government should either nationalise the bank or support it but take an equity share as a price for that support.

The State should “give itself potential for upside”, he said.

Documents released yesterday also show that the former Financial Regulator, Patrick Neary, told the Taoiseach and the Minister for Finance five days before the bank guarantee that there was no evidence that Anglo Irish Bank was insolvent “on a going concern basis” but that it was simply unable to continue in its current form from a liquidity point of view.

At a meeting on September 25th, Mr Neary said he also believed that Irish Nationwide Building Society was in a similar situation to Anglo. That meeting was attended by the Taoiseach, the Minister for Finance, officials from the Department of Finance, the Attorney General, representatives from Merrill Lynch, PwC, Arthur Cox and the NTMA.

The mounting liquidity crisis and the role of the NTMA was also discussed in a meeting on September 22nd, where it was decided to seek legal advice about the powers of the NTMA.