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.

We agreed to meet them out of courtesy and the meeting took place early afternoon in the boardroom of Bank of Ireland at Baggot Street. I recall it was a short and amicable meeting, which lasted no more than 30 minutes.

After some general opening remarks, they told us they were suffering a significant liquidity issue. They had facilities rolling over the next day and whilst I cannot be sure whether I was told then (or later in the day), I believe that these facilities were in the region of €1 billion or €2 billion. They said they could not replace those facilities and they asked us if Bank of Ireland would consider taking over Anglo Irish Bank. Our response was that we would not and the meeting then concluded.

Richard Burrows and I then had a debrief meeting. We felt this was a telling approach because clearly there would be no strategic value in such a proposal to Bank of Ireland and we could only assume that the liquidity difficulties of Anglo Irish Bank were now critical. This would have a detrimental effect on the other financial institutions in the Irish market – including Bank of Ireland – as if Anglo Irish Bank collapse then there would be a significant collateral damage.

Richard Burrows had a prearranged meeting with the governor of the Central Bank – John Hurley – that afternoon and the purpose of this meeting was to ask him to request the ECB to extend the options available for banks to obtain funding from them by broadening the rules in relation to other forms of collateral that were acceptable. Richard Burrows went to that meeting and when he came back he told me that he had updated John Hurley in respect of our meeting with Anglo Irish Bank.

We then had a further debriefing meeting as the markets were closing around 5pm and we concluded that the situation was very grave and that we should request a meeting with the Taoiseach and the Minister for Finance.

We felt that for the meeting to be of value it should be a joint meeting with ourselves and AIB as the other main bank in this jurisdiction, and consequently I rang Eugene Sheehy (the chief executive officer of AIB) and Richard Burrows rang Dermot Gleeson (the chairman of AIB) and they agreed that such a meeting should take place and that they would attend.

My recollection is that we put in a call to the Taoiseach’s office and AIB called the Department of Finance and that these calls were made around 6.30pm. We were then told that the Taoiseach and the Minister for Finance would meet with us at 9.30pm that day.

We then attended the meeting at Government Buildings. The principals who attended were as follows: Richard Burrows and I attended on the behalf of Bank of Ireland; Eugene Sheehy and Dermot Gleeson attended on behalf of AIB; Brian Cowen (the Taoiseach), Brian Lenihan (the Minister for Finance), Paul Gallagher (the Attorney General), John Hurley (the governor of the Central Bank), Dermot McCarthy (the secretary general to the Taoiseach), David Doyle (the secretary general of the Department of Finance) and Kevin Cardiff (the assistant secretary of the Department of Finance) also attended on behalf of the Government.

We set out the position as we saw it and our concerns in relation to Anglo Irish Bank in particular, and the significant collateral damage that would be caused to the entire banking system if Anglo defaulted the following day.

We explained that we felt it was necessary for the Government to guarantee the deposits and borrowings of the banking system as a consequence of Anglo Irish Bank’s grave position. This was not a new concept as my recollection is that the possibility of the Government providing a guarantee for institutions was one that had been considered already as we had been told during a meeting some time before with the Central Bank/financial regulator that some institutions had been actively suggesting this.

It seemed to me the people in the room were well aware of the extent of the problem and had no doubt they had been fully briefed by John Hurley. In fact, my sense was that if we had not requested this meeting, then the request would have come from Government.

Both Bank of Ireland and AIB were asked to consider providing immediate and substantial liquidity support to Anglo Irish Bank, under a Government guarantee, until the end of that week. I remember that I had an exchange with John Hurley and emphasised that the credit risk would be addressed by the guarantee but I needed absolute assurance that the actual funds would be returned to us by the end of the week due to our own liquidity requirements.

Both banks left the room and independently considered the funding request for Anglo Irish Bank. I had a treasury team on standby back in Baggot Street and after making appropriate inquiries and having consulted with Richard Burrows, I was able to confirm that we could make up to €5 billion available and AIB did likewise.

We rejoined the meeting and we (and AIB) confirmed the support that we could provide, and my recollection is that the mood immediately improved and we were then told what the Government proposed was to provide a guarantee for all financial institutions in the State in order to protect the banking system.

Following this meeting I put the necessary approval steps in place for the draw down of the €5 billion temporary facility to assist Anglo Irish Bank but this facility was never drawn down as it was not required following the issuing of the Government guarantee the following morning.

The meeting finished at 3.30am.

Dermot Gleeson
Chairman of AIB
(2003 - 2009)

I have been asked about the events leading up to the bank guarantee scheme of September 2008, and about contact between Anglo management and AIB management.

On the afternoon of September 29th, 2008, I received a phone call from Seán FitzPatrick of Anglo Irish Bank requesting a meeting about their difficulties. I declined to meet him, saying that we had matters of our own to attend to but I wished him well.

On the same afternoon of Monday, September 29th, 2008, I received a phone call from Richard Burrows, the chairman of the Bank of Ireland. He told me that he had also been approached by Seán FitzPatrick of Anglo Irish Bank, seeking assistance. At that stage there was uncertainty and turmoil in the financial markets across the world. In Ireland it focused particularly on the Anglo Irish share price.

Richard felt that things had got to a stage where we should speak with the Taoiseach and the Minister for Finance. I agreed and we arrived at Government Buildings at about 9.30pm.

We were taken to a conference room where the following people were present, The Taoiseach Brian Cowen, the Minister for Finance Brian Lenihan, the Attorney General Paul Gallagher, the governor of the Central Bank John Hurley, the secretary general of the Taoiseach’s Department Dermot McCarthy, David Doyle and Kevin Cardiff from the Department of Finance and Eugene McCague of Arthur Cox and Company.

Later that evening we were joined by Mr Tony Grimes from the Central Bank, who took Mr Hurley’s place when he had to leave. Over the course of the evening I also met Mr Patrick Neary, the then chief executive of the Irish Financial Services Regulatory Authority, as well as Padraig O’Riordan, who is the managing director of Arthur Cox. Discussions took place through the night.

Both myself and Eugene Sheehy, CEO of Allied Irish Bank, and Richard Burrows and Brian Goggin, chairman and CEO of Bank of Ireland, spoke several times during the night at intervals. The main topic of discussion was the problems with Anglo Irish Bank and a suggested Government bank guarantee scheme.

We (Bank of Ireland and Allied Irish Bank) were asked to check with our staff and determine what level of funding support we could give to Anglo Irish Bank the next morning and for the rest of the week. We eventually agreed that each of us (BoI and AIB) could fund Anglo to the amount of €5 billion each.

It was all done, however, on foot of the very clearest representations from the Central Bank governor, made in the presence of the Government (although not endorsed by the Government), that an orderly dealing with Anglo would occur at the following weekend.

I assumed that this meant nationalisation or receivership of some kind, but the precise mechanism by which the State would take Anglo out was not of any particular concern to me. The Government made clear that they were not making any agreement with us, simply hearing submissions. And the Government would then make their own decision.

The Attorney General said to me personally that I should understand that the Government were not undertaking to do anything with any particularly institution and I said that I understood that. Later on in the morning of September 30th, 2008, the Government announced its bank deposit guarantee scheme. Subsequently we were not required to provide the €5 billion.

Our approach to the Government with Bank of Ireland occurred as a result of the general chaos of which Anglo was, of course, a part.

I subsequently made a dictaphone recording of these events. A typed note was then produced from this recording. This note details the meeting of September 29th, 2008, including attendance.

Eugene Sheehy
Chief executive of AIB (2005 - 2009)

During the summer of 2008 pressure began to build up on the banking system and people began to lose confidence internationally. There were a number of significant international events, the failure of the Icelandic banks and the difficulties at Northern Rock which impacted on retail depositor confidence in the Republic and the UK.

The international crisis reached a peak mid-September 2008 with the failure of Lehman Brothers bank in the United States. These problems had an impact on all banks in the western world and affected bank funding negatively, particularly the duration of deposits. Longer-term deposits were becoming more difficult to source.

During this period there was a lot of interaction between AIB, the Central Bank, the financial regulator and the Department of Finance.

Our main contacts in the financial regulator’s office were Pat Neary and Con Horan; in the Central Bank John Hurley, Tony Grimes and Brian Halpin; and in the Department of Finance Kevin Cardiff, Ann Nolan and William Beausang. A meeting was arranged for the evening of September 29th, 2008.

This was attended by the Taoiseach Brian Cowen, the Minister for Finance Brian Lenihan, the Attorney General Paul Gallagher, the governor of the Central Bank John Hurley, Kevin Cardiff (then assistant secretary at the Department of Finance), David Doyle (secretary, Department of Finance), Eugene McCague from Arthur Cox and four or five more.

This meeting took place on the evening of September 29th,2008, and the morning of September 30th, 2008. I recorded a note of the meeting shortly afterwards which contains details of the people who attended and the discussion.

There was a need for a meeting because of the overall situation regarding public confidence in the banking system. As a result of the meeting the Government implemented a guarantee and the banks (AIB and BoI) agreed to make available, via the Central Bank, funding of up to €10 billion to Anglo Irish Bank. Prior to the meeting I had no special knowledge of the particular difficulties that Anglo Irish Bank were experiencing. In the note referred to above (ES1), I referred to threats to the system generally because of the weakness of Anglo and Irish Nationwide.

We had some detail to support our concerns about Irish Nationwide. In relation to Anglo, our concerns were based on the nature of their deposit base, it being essentially non-retail and with substantial percentage of deposits in the UK.

At the meeting we were told that Anglo needed funding that week. I understood this to be a liquidity issue. In the days prior to this meeting I am aware that the chairman of Anglo Irish Bank, Seán FitzPatrick, phoned the chairman of Allied Irish Bank, Dermot Gleeson, but I am not aware of any requests that were made.

I am aware that Mr Gleeson informed him that we would deal with our own issues and wished him well. It has been alleged that a meeting took place in or around that time between the chairmen and CEOs of both Anglo and AIB. No such meeting took place.

Alan Gray
Managing director of Indecon International Economic Consultants

I am an independent economist and academic author or co-author of a number of books on economics and unemployment including responses to Irish unemployment and employment potential in Irish manufacturing.

I also authored the book on the economic consequences of peace in Ireland which was launched at Government Buildings by Mr John Bruton when he was Taoiseach. I edited the book on international perspectives of the Irish economy which examined economic competition and policy issues and included contributions from US Nobel Prize winner Kenneth Arrow and Paul Krugman who subsequently won the Nobel Prize fr economics.

More recently I co-authored the book on economic analysis of Ireland’s comparative advantage for foreign direct investment.

I am managing partner of Indecon International Economic Consultants and chairman of London Economics which is a European economic consultancy and research organisation with its head office in London.

I have provided independent advice to respective governments in Ireland and internationally for over 25 years. My first government appointment was as chairman of the Independent Government Commission of Inquiry on the Whitegate Oil Refinery and Irish Oil Prices appointed by Taoiseach Dr Garret FitzGerald. I was subsequently appointed by Taoiseach Mr Albert Reynolds as a member of the Taoiseach Task Force on Jobs in Services. I have also served as an independent economist on other government advisory groups appointed by various governments, including appointing to the National Competitiveness Council. I was appointed as an independent non-executive of the Central Bank at the start of 2007 and was recently invited by Taoiseach Mr Enda Kenny to participate at the recent Global Economic Forum at Dublin Castle.

I am currently advising various governments in Europe, including the prime minister’s office in Malta, and I have also worked as a consultant to the European Commission.

The background to the statement is that I was invited to join An Taoiseach Mr Brian Cowen on July 28th, 2008, to discuss responses to escalating unemployment in Ireland and the problems in the Irish economy, and I was happy to attempt to contribute to this discussion.

At the dinner which was held in Druids Glen Hotel, An Taoiseach was joined by Mr Gary McCann, chief executive of Smurfit Kappa Group and Mr. Fintan Drury and Mr. Seán FitzPatrick, then chairman of Anglo Irish Bank. There was no discussion when I was present of any banking issues or any issue concerning Anglo Irish Bank.

The focus was on the problems of the Irish economy and of rising unemployment. I outlined a number of detailed ideas on what actions I thought were appropriate to tackle the emerging crisis in the Irish economy.

Subsequent to the dinner on July 28th, Mr Seán FitzPatrick called my office on the telephone and indicated that he was close to my Dublin office and requested a short meeting. Mr FitzPatrick did not indicate the purpose of this meeting in advance. At the meeting Mr FitzPatrick indicated that the Irish banking sector and Anglo Irish Bank was experiencing liquidity difficulties. I indicated that this was well known in the market and recommended that the appropriate channel to discuss this was for Anglo Irish Bank to contact officials in the Central Bank. Mr Fitzpatrick indicated that they were already informed and the meeting concluded after a number of minutes.

To my surprise, late in September, most likely on the 29th, Mr FitzPatrick and Mr. Drumm arrived unexpectedly at my office. I did not know Mr FitzPatrick prior to meeting him on July 28th, and I had never met Mr Drumm. At the meeting they expressed their view that due to the crisis in the international financial markets, Anglo were experiencing extremely severe liquidity difficulties – a fact which was of no surprise to me as this was by now well known in the financial markets.

I again indicated that they should discuss this with the Central Bank officials and they indicated that this had been done. Mr Drumm had a presentation with him but did not give this to me and he used it as brief speaking notes.

At no stage did they ask me to take any action or make any representations to any other parties. No other issues were discussed. I concluded the meeting which in total lasted approximately 5-10 minutes. I did not attribute any particular significance to the meeting.

On the night of the Government guarantee, An Taoiseach contacted me by telephone to obtain my views as an independent director of the Central Bank on the likely market reaction if a Government guarantee of banking deposits was introduced. This idea had been floating around for some time, and I think may have been first proposed by economist David McWilliams.

In the telephone discussion I focused on the issue of the importance of considering compliance with EU state aid and suggested that if there was any guarantee, a fee should be charged to the banks, and that it should be time limited. This view was based on my experience as a competition economist.

In relation to the meeting with Mr Seán FitzPatrick and Mr David Drumm on September 29th. The discussion at this brief meeting centred around Mr FitzPatrick and Mr Drumm outlining that the crisis in banking wasn’t just an Anglo Irish Bank problem but a problem in banking as a whole.

At this brief meeting there was no mention of Anglo Irish Bank not being able to open the following day. Both Mr FitzPatrick and Mr Drumm stated that the liquidity problems were affecting all banks.

This meeting took place at my office at 4 Fitzwilliam Place, Dublin 2, Mr FitzPatrick and Mr Drumm arrived unannounced at my office at 3pm or 4pm. That time is to the best of my recollection. The first meeting took place at my office at 4 Fitzwilliam Place. This to the best of my recollection took place roughly around a month after the July 28th, 2008, dinner.