What the bankers knew on the night of the bank guarantee . . .

How events unfolded on September 29th, 2008, that will ultimately cost us €64bn

Sat, Apr 19, 2014, 03:00

Richard Burrows
Governor of Bank of Ireland (2005-2009)

In the run up to September 2008 conditions in the international financial markets had become very difficult. Bank of Ireland was concerned by the situation internationally and was concerned to ensure its own liquidity and that its assets books were properly collateralised. During this time I had regular but infrequent meetings with the governor of the Central Bank of Ireland (CBI), Mr John Hurley. However, the then chief executive officer of the Bank of Ireland was the primary contact with the CBI and with the Irish Financial Services Regulatory Authority (the financial regulator.)

The events of September 29th, 2008
On the morning of September 29th, 2008, I met with Brian Goggin who had been meeting with officials from the financial regulator over the weekend in relation to Bank of Ireland’s potential interest in Bradford & Bingley Building Society. We discussed our general concern regarding the increasing withdrawal of deposits from Bank of Ireland. I was due to meet with John Hurley that afternoon to discuss the possibility of the European Central Bank (ECB) extending the availability of credit.

I believe that I received a call from Mr Seán FitzPatrick, then chairman of Anglo Irish Bank, at about noon in which he requested an urgent meeting with myself and Brian Goggin. I agreed to his request, and myself and Brian Goggin met with Mr FitzPatrick and Mr David Drumm, then chief executive of Anglo Irish Bank, in a boardroom at the bank’s head office on Baggott Street at approximately lunchtime.

This meeting was quite short. Mr FitzPatrick claimed that Anglo Irish Bank had a significant credit facility which was to fall due the following day and that it was not in a position to repay this facility or to roll it over. I cannot, at this stage, recall the size of this facility but I remember that it was significant. Mr FitzPatrick asked if Bank of Ireland would be interested in buying Anglo Irish Bank or any part of it.

I informed Mr FitzPatrick that the acquisition of Anglo Irish Bank or any part of it was not something of interest to Bank of Ireland. The meeting then concluded, and Mr FitzPatrick and Mr Drumm left, with Mr FitzPatrick saying that he was going to contact Allied Irish Banks plc.

As I was now aware that Anglo Irish Bank was going to face a very serious difficulty the following day, I decided that this was something I had to raise with Mr John Hurley at my scheduled meeting that afternoon. During my meeting with Mr Hurley I updated him on the position as I understood it regarding Anglo Irish Bank. Mr Hurley advised me that there was very little that he could do in the circumstances.

Following my return from my meeting with Mr Hurley, I spoke with Mr Goggin. We were both concerned about Anglo Irish Bank’s position and the risk of collateral damage to Bank of Ireland. We decided that we should seek an urgent meeting with the government to update them on the situation. We both felt that AIB would share a similar view to our own, so I called the then chairman of AIB Dermot Gleeson.

He agreed that such a meeting should take place and said that he and Eugene Sheehy, the then chief executive officer of AIB, would also attend. Telephone calls were then made to the Offices of the Taoiseach and the Minister of Finance, and a meeting was scheduled for approximately 9.30pm that night.

When we arrived in Government Buildings we were shown into a waiting room and subsequently invited to meet with the Government officials. As I recall, the meeting was attended by the Taoiseach, the Minister for Finance, the governor of the Central Bank, the secretary general to the Taoiseach, the secretary general to the Department of Finance, and the assistant secretary of the Department of Finance. I believe that there were others who came and left the room at various stages during the meeting but I cannot be certain.

The Taoiseach asked us to explain the purpose of this meeting and I briefed the meeting on the general global issues in the international financial markets and specifically the concerns which we had arising from our meeting with Anglo Irish Bank earlier that day.

I recall that Mr Gleeson also addressed the meeting and that Mr Sheehy and Mr Goggin also spoke. I recall that Mr Hurley asked if AIB and Bank of Ireland could provide immediate liquidity support to Anglo Irish Bank. I recollect that the amount being discussed was approximately €5 billion each.

We left the room to consider whether this was something that the Bank of Ireland could provide and Mr Goggin made some calls to Bank of Ireland to see if this could be done.

We were subsequently invited back into the meeting and I confirmed that the Bank of Ireland could provide this amount of liquidity but that it would require a guarantee from the Government that the Bank of Ireland would get its money back.

We were then informed that the Government was considering putting in place a guarantee of all of the Irish financial institutions and that there would be a Cabinet meeting the following morning to approve this. I cannot recall the exact time that the meeting ended but it was very late, approximately 3.30am or 4.00am.

Brian Goggin
Chief executive of Bank
of Ireland (2004-2009)

In my view the financial crisis can be traced back to the middle of 2007 which saw the beginning of the US sub-prime mortgage lending crisis. The position continued to deteriorate from that time, which saw the closure of the securitisation markets and a severe contraction of liquidity in global financial markets which in turn led to the near collapse of Bear Stearns (in late 2007), the failure of Iceland’s banks and other financial institutions – such as Merrill Lynch / Wachovia Bank – suffering significant difficulties during this period.

The failure of Lehman Brothers in September 2008 sent further shockwaves across the global financial system and this was compounded by the rescue of AIG. Several banks in the UK and across Europe were supported and/or rescued in and around the same time.

As a result of these developments and throughout the period from mid-2007 right through to September 2008, there was a sharp contraction of the liquidity that was traditionally available for lending to financial institutions through international money markets. In particular, there was a continuous reduction of the period of time which facilities could be rolled over.

Before the crisis arose there was no real difficulty for institutions such as Bank of Ireland to put in place significant facilities on a long term basis e.g. 18 months/2 years, but as the position of the financial markets deteriorated up towards September 2008, it became much more difficult to raise funds and much more difficult to raise funds on a long-term basis. In fact, by September 2008 financial institutions were often only in a position to put in place significant facilities on an overnight basis.

At this time I was attending regulator meetings with the Central Bank and the financial regulator to discuss this developing liquidity crisis as they wanted to have better visibility of what exactly was happening in the markets on a daily basis and our observations on this in relation to both the domestic and the international markets.

My impression was that the Central Bank and the financial regulator were considering what would happen if things became worse and presumably with a view to putting in place a contingency plan.
Anglo Irish Bank
I was asked to clarify what my knowledge was of the financial position of Anglo Irish Bank leading up to the events of September 29th, 2008.

I had no specific knowledge of the financial position of Anglo Irish Bank. However, I could make an educated guess from Bank of Ireland’s experience in the market place. As stated above, it was very difficult to obtain facilities from the international money markets and it was only possible to do so on a very short-term basis. I was of the view that Bank of Ireland was in a better position than other banks given our very strong and significant Irish and UK mortgage books (also eligible as collateral at the ECB).

Notwithstanding that much of Anglo Irish Bank’s balance sheet was made up of customer deposits, I was of the view that if we were facing liquidity difficulties, then the liquidity difficulties which Anglo Irish Bank were likely to be facing would be much worse, evidenced, for example, by the premium price Anglo Irish Bank offered for deposits.

The Central Bank and the financial regulator were conducting a monitoring process on a daily basis of liquidity issues for all financial institutions and presumably they had a very clear picture at this time as to the liquidity position of Anglo Irish Bank.

The events of September 2008
I had no ongoing dialogue with Anglo Irish Bank prior to the events of September 29th, 2008.

I recall that a call came into the bank late that morning (either to my secretary or the secretary of the chairman – Richard Burrows) and this call was a request for us, i.e. myself and Richard Burrows, to meet with Seán FitzPatrick (chairman) and David Drumm (chief executive officer) of Anglo Irish Bank to discuss the general state of the market.