24 hours that brought Irish banks back from the brink

Sat, Oct 4, 2008, 01:00

THE INSIDE STORY: Mark Hennessytells the inside story of how the plan to rescue the banks was hatched in the dead of night after the country's leading bankers presented the Government with a doomsday scenario

IRELAND'S top bankers do not usually play a supplicant's role.

Sitting, however, in Taoiseach Brian Cowen's oak-lined office shortly before midnight on Monday underneath a portrait of Éamon de Valera there was little doubt about how much trouble they were in.

The bankers uneasily waiting there were Eugene Sheehy and Dermot Gleeson, chief executive and chairman of Allied Irish Bank (AIB) respectively, and their two counterparts from Bank of Ireland, Brian Goggin and Richard Burrows.

Four hours earlier, following a disastrous pounding for Irish bank shares on the stock markets, the four had hurriedly sought a meeting with Cowen and Minister for Finance Brian Lenihan.

Having arrived at Government Buildings at 9.30pm, they were taken to the Sycamore Room, once so beloved of Charles J. Haughey, and left to wait, and wait. Nearby, Cowen was chairing another meeting, involving Central Bank governor John Hurley and the chief executive of the Financial Regulator, Pat Neary.

Two hours elapsed before the bankers, who had been left on their own, were called in before Cowen and Lenihan, who asked some questions, but mostly listened. The bankers' message was not that Anglo Irish Bank was about to collapse; or that Irish Nationwide was on the brink, though both had cash shortages to face on Tuesday and Wednesday. Instead, it was that they themselves were facing crisis.

"(They) made it clear to us that liquidity was drying up in the Irish banking system and the maturity dates for the various loans they need to fund their business were shortening all the time and reaching dangerous levels of exposure in terms of time limits," Lenihan would later explain to the Seanad.

The air of crisis had mounted on Monday as the collapse in the banks' share value became more brutally evident on the stock markets. David Doyle, secretary general of the Department of Finance, Hurley, Neary, and others were in close contact throughout, before heading to Government Buildings after the 4.30pm close of markets.

The option eventually chosen - to guarantee "the deposits, loans and obligations" of the six Irish banks - had been circulating within the Department of Finance, the Central Bank and Government Buildings for over two weeks. The idea was also circulating elsewhere and economist David McWilliams argued strongly for it in a column in The Sunday Business Post last Sunday. McWilliams also spoke to the Green Party leader, John Gormley, four days before the article. Since then, he has claimed credit for the idea, to the quiet fury of State officials.

In the weeks leading up to the decision, the Government had also considered nationalisation of one of the banks, whereby it could be run as a going concern with new capital, or simply run down. In the fortnight before the eruption of the crisis, Department of Finance officials favoured getting new investors for any crisis-hit bank, rather than a State takeover.

Indeed, AIB and Bank of Ireland were asked by, or before, last weekend by the Central Bank to inject capital into Anglo Irish, according to numerous sources. However, the two baulked, frightened by Anglo's €110 billion loan book. The proposal looked less attractive in light of institutional investors' reactions and the Government's refusal to underwrite the deal, and guarantee them against losses.

After markets closed on Monday, Lenihan came from the nearby Department of Finance at 6pm, and was soon closeted with Cowen; Attorney General Paul Gallagher; Central Bank governor Hurley; Tony Grimes, the Central Bank's director general; Financial Regulator Neary; the department's second secretary general, Kevin Cardiff, and assistant secretary, William Beausang. Key advisers, such as Joe Lennon, Peter Clinch - a relative newcomer to Government Buildings but already known as "The Prof"- and Eoghan Ó Neachtain were also on hand.

By then, it was clear to those in Government that some of the institutions could be facing disaster if they were to sustain another such day, but hope remained that the US Congress would pass the $700 billion bailout and restore stability, if only for a time.

Up until then, Cowen and Lenihan had decided that radical action had to be taken, but they hoped that it could be delayed until the weekend when markets were closed. However, a note sent into the meeting detailing the result of the Washington vote ended any such timetable.

A second note followed shortly afterwards telling of AIB and Bank of Ireland's call to meet urgently.

A number of Ministers, including Micheál Martin, Mary Coughlan and Noel Dempsey were put on notice that a Cabinet decision would have to be reached over the telephone later that night, which are known as "incorporeal" meetings when Ministers cannot be brought together in time.

By then, the European Commission had learned "something serious was up in Dublin"; but not its detail. Cowen fretted that the press would learn details early.

Once brought into the meeting, the four bankers made their stark presentation and left. The actions to be taken next were not discussed in front of them. But the next move was not long in coming: all six Irish banks would be fully underwritten. Other non-Irish banks operating here would be considered on a case-by-case basis.

Brought back into the meeting, the proposal was put to the bankers, but they were given time "to reflect", and to consult with colleagues. Sheehy and Gleeson returned to the Sycamore Room, while Goggin and Burrows held hushed calls on the corridor, before they were ushered into the building's dining room for privacy.

Grimes and Neary, for the Central Bank and regulator respectively, were in contact with other bank chief executives.

By now, the occupants of Government Buildings were without food, or bottled water. The crate of Spar sandwiches that had been brought in earlier had long since disappeared while officials watched RTÉ's Questions and Answers.

The issue of the foreign-owned banks operating here has been highlighted by the Opposition since, as they argue that the Government has unknowingly written a blank cheque. However, the Attorney General had raised the issue of those banks; and of the dangers posed by foreign subsidiaries owned, or part-owned by the Irish banks themselves during Monday night's talks.

"Our first obligation was to the Irish banks but it was always known that we would have to consider foreign-owned banks," said one figure, closely associated with the events.

Preparation on a press release had begun shortly after 9pm - even before the bankers had arrived in Government Buildings. It was drafted and redrafted throughout the night but the substance did not change. During this work, the phrase "serious disturbance in the economy" was removed before it was hurriedly returned because it could offer some protection in time against any European Union challenge on state aid rules.

Under EU law, member states have the freedom to intervene to prevent a "systemic" collapse in the national banks, though the Irish action has not been met warmly there. However, mergers valued at €5 billion or over must be approved by Brussels, leaving a question mark over Lenihan's powers to approve unions.

While a number of senior Ministers had already been put on notice, the Cabinet secretariat contacted the remainder, telling them to be ready for the "incorporeal" meeting between 1am and 2am. Even then, most Ministers were not told exactly of the decision's scope. Willie O'Dea was woken shortly after 1am by his ringing mobile, but it had gone to voicemail by the time he got to it. The landline by his bed rang seconds later.

Green Party leader John Gormley had more knowledge than most of an imminent banking crisis but, up until then, the secretariat had failed to make contact with him because his mobile had run out of power. In the end, Irishtown Garda station was called, and they sent a garda to his Ringsend home to wake him and ask him to ring the Taoiseach's office.

Thereafter, the secretariat rang all the Ministers again, and detailed the proposal, asking for their decision. All agreed to it. Martin was in Newark Airport returning to Ireland from the United Nations General Assembly, when he went to a private room to take the call.

Once the bankers left at 3.30am, Cowen told Lenihan to go home to bed for two hours to ready him for the crucial round of early-morning press interviews and calls, before he too left at 5.45am, also for little more than two hours.

Back in his office, before 6am, Lenihan called the French finance minister and the current chairwoman of EU finance ministers, Christine Lagarde, and the Luxembourg prime minister, Jean Claude Juncker, who heads the group of euro zone member states, and, mostly in French, briefed them on Ireland's decision.

An advance copy of the decision had been sent at 4.30am to the European Central Bank, followed by a call from John Hurley to its head, Jean-Claude Trichet. Lenihan called Fine Gael leader Enda Kenny, while the latter was walking around TV3's Ireland AM studio, waiting to go on air for a pre-arranged interview.

Lenihan also called Labour leader Eamon Gilmore. Conversations later took place with Fine Gael finance spokesman Richard Bruton and his Labour counterpart Joan Burton.

A call to RTÉ's George Lee rang out, so, with time of the essence, his colleague David Murphy was called instead, getting the interview with Lenihan on to the airwaves first.

The statement entered the public arena at 6.45am, causing consternation among the banks not immediately included along with the six Irish institutions. And the consternation made itself heard very, very quickly - and directly to the man next in line for the throne of England.

Furious at the news, Sir Fred "The Shred" Godwin, chief executive of Ulster Bank's parent, Royal Bank of Scotland, called Prince Charles, as well as the British prime minister Gordon Brown, sources say.

Brown's chancellor of the exchequer, Alastair Darling, quickly called Lenihan. "He was very unhappy, let's put it that way," said one closely involved in the night's events. Demanding a reversal of the decision, Darling warned that money would flood out of British banks. Lenihan listened, but gave no succour and said he had to protect Ireland's interests. Later, he called again.

Brown rang Cowen later. Though he expressed concern, he did not ask for the guarantee to be stopped, but he did urge Cowen to do something for UK bank subsidiaries operating here. Replying, Cowen, no doubt conscious of the lack of warning by London when it nationalised Northern Rock 12 months ago, said Ireland had to look after its own banks.

However, Brown has not left the issue rest, speaking twice against it in telephone calls this week to the President of the European Commission, José Manuel Barroso.

Now empty of bankers, the Sycamore Room hours later hosted Fianna Fáil Ministers for their usual pre-Cabinet meeting breakfast at 8.30am. Some were clearly stunned by the night's events. Exhausted, Cowen made no effort to hide the situation's gravity. One of those present reported the Taoiseach saying: "We came very close to the brink."

By then, Cowen had already become annoyed by the response of Labour's Joan Burton, and he became even more irritated by her as the week progressed. But the markets had opened and the tidings were good: "That helped to settle people. We took heart from that," a Government source said.

Lenihan dropped in briefly, adrenaline-pumped. "I was surprised at how sprightly he looked," said one colleague, impressed by his performance since the decision was made.

One senior banker turned up at the Department of Finance offices in Merrion Street without an appointment, demanding to see Lenihan. Sources say he declared: "You're trying to screw us."

It had been reported that the banker was Ulster Bank chief executive Cormac McCarthy, but that is not the case.

Once Cowen had met Gormley and Mary Harney for their usual pre-Cabinet tete-a-tete, the full meeting of Ministers began, about 45 minutes late.

Here, Lenihan and AG Gallagher went through the draft legislation line-by-line, facing questions quickly from Tánaiste Mary Coughlan and Minister for Agriculture Brendan Smith.

Both representing Border constituencies, they had already been contacted by mobile phone by infuriated officials in Ulster Bank on their way to the meeting in their ministerial cars.

The issue of foreign subsidiaries had not been raised with other Ministers before they had given their assent in the earlier "incorporeal" contacts. But both Smith and Coughlan raised it now.

Lenihan said the Irish-regulated banks were first and he would "wait and see" about everybody else. Asked about the emergency plan's possible cost, Lenihan told colleagues that banks will be levied if one of them does collapse, and that these payments would be used to settle the defunct bank's debts before the State will have to face any bill.

"An awful lot is about confidence," said one Cabinet Minister. "Bankers around Dublin were doing as much damage as anybody outside them because they were all trying to get their own advantage . . . It is all right as long as the guarantees are not called in."