Merrill file says no right or wrong answer available

THE CONSULTANTS:A "PROS and cons" document drawn up by advisers Merrill Lynch two days before the announcement of the blanket State guarantee of Irish banks said there was "no right and wrong answer" available to the Government.

It queried the likelihood that Irish Nationwide and Anglo Irish Bank would be able to survive, given the then view of wholesale money markets on such “monoline” institutions and said they should be dealt with quickly to avoid a “systemic issue”.

It set out a series of steps that could be taken to deal with the crisis, involving providing additional money to INBS and Anglo, and preparing to take the two into State control. This could be combined with a targeted State guarantee for depositors and senior creditors in the two, which would involve an “implicit message” that this level of protection would be provided to all Irish banks.

The document devoted just one paragraph to the option of a blanket State guarantee for depositors and senior creditors of the six main regulated institutions, the solution opted for by the Government on the night of September 29th, 2008. The scale of such a guarantee would be €500 billion, the document pointed out.

“This would almost certainly negatively impact the State’s sovereign credit rating and raise issues as to its credibility. The wider market will be aware that Ireland could not afford to cover the full amount if required.”

The document also said such a move might be poorly received by other European states.

An earlier document, produced on September 26th for a presentation to the National Treasury Management Agency, said a blanket guarantee was “best, most decisive, most impactful from market perspective”. It said such a move would stem outflows and could prompt inflows of deposits. It also protected senior and subordinated creditors.

The downsides of such a move, according to the document, included its impact on Ireland’s credit rating. It also noted that it would be contentious on a European level.

The document said a proposal for a secured lending scheme would not deal with the difficulties facing Anglo and INBS.

Also, the Government “could/will likely end up funding the entire Anglo Irish/Irish Nationwide balance sheet [€84 billion – €120 billion?]. Even with zero usage by other Irish banks.”

Merrill Lynch was engaged on September 24th to advise on the options available to the Government and produced its report at 6pm on Sunday, September 26th.

It noted “it is important to stress that at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised. However, liquidity for some could run out in days rather than weeks”.

On INBS, it said the asset quality of the society’s commercial loan book was regarded as “being generally good”, but there were concerns about the influence of the then chief executive, Michael Fingleton. An extreme test case analysis showed most of the society’s reserves of €1.8 billion being depleted.

On Anglo, it said the same stress test would deplete ordinary shareholders and lower category subordinated debt by €7.5 billion. This would have wiped out the bank’s tier-one capital.

The advisers said they were clear in their view on one matter – they were against allowing an Irish bank to fail and go into liquidation without any Government intervention. “The resulting shock to the wider Irish banking system could, in our view, be very damaging.” They strongly advocated a controlled, interventionist approach.

While reviewing the possibility of taking control of INBS and Anglo, the document noted that at Anglo “the majority of equity and debt investors are Irish, UK and US institutional holders, but there are significant retail interests including a major shareholding by Seán Quinn”.

A memo of a meeting on September 26th, attended by Minister for Finance Brian Lenihan and advisers, noted Merrill Lynch’s view that bank management had an incentive to be optimistic about banks’ prospects as Government intervention would lead to changes in the management team.

It also noted that decisions had to be made in relation to the scale of any intervention and who should be protected. It noted that Merrill Lynch believed a blanket guarantee for all banks “could be a mistake and hit national rating and allow poorer banks to continue”.

The documents released include an e-mail sent on September 29th at 6.37pm from Kevin Cardiff of the department to Henrietta Baldock of Merrill Lynch. It stated he was in a meeting with Taoiseach Brian Cowen, and needed the Merrill Lynch “pros and cons” document. The document was forwarded to him at 6.43pm. A few hours later, the Government decided to go for a blanket guarantee.