A question on Anglo that will not go away

 

It is terrifying to think that Brian Lenihan’s justifications of the bank guarantee are factually incorrect, writes FINTAN O’TOOLE

A FORTNIGHT ago, I asked a simple question of the Government: “How much money for Anglo [Irish Bank] is too much?” Whatever view one takes of the Government’s banking strategy, this is surely a reasonable question. The wisdom of any financial transaction obviously depends on the price. Buying a loaf of bread may make sense if the price is €2. It can’t make sense if the price is €10.

Minister for Finance Brian Lenihan kindly replied to my article. He entirely avoided the question. This is surely rather alarming.

The most basic principle that must underlie any Government decision – let alone one that involves dumping at least €22 billion into a black hole – has to be a cost/benefit analysis. If you don’t know the cost, if there’s no upper limit on what you’re willing to pay, then the decision is implicitly bad. It’s not policy-making. It’s gambling. So let’s ask the question again – how much money for Anglo is too much?

While he’s answering that question, Lenihan might also address an aspect of his initial reply that is, if anything, even more disturbing. In the course of that reply, he made two statements that are, on the face of it, factually wrong.

The first concerns the views of the governor of the Central Bank, Patrick Honohan. Lenihan writes: “In his recently published report on our banking crisis, Prof Honohan . . . endorses the Government’s assessment that ‘a disorderly failure of Anglo would in the absence of any other protective action have had a devastating effect on the remainder of the Irish banks’ . . . On the matter of the guarantee, Prof Honohan said ‘it is hard to argue with the view that an extensive guarantee needed to be put in place, since all participants (rightly) felt that they faced the likely collapse of the Irish banking system within days in the absence of decisive immediate action’.”

What Lenihan is telling us is that Prof Honohan agreed entirely with the Government’s decision to extend the blanket guarantee to Anglo – with the exception of the relatively minor matter of including subordinated debt.

What’s alarming about this is that it bears little relationship to what Prof Honohan actually says in his report. In fact, while he argues that some sort of guarantee was necessary (a position that hardly anyone would dispute), he is critical of the decision to extend a blanket guarantee: “The extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State’s potential share of the losses.”

On any understanding of the English language, what Honohan is saying here is that the blanket guarantee covered too much and in the process increased the risk of losses for the State.

Equally, and specifically in relation to Anglo, Honohan most certainly does not endorse a blanket guarantee. What he says is that a “disorderly” collapse of Anglo would have been catastrophic for the other banks “in the absence of any other protective action”.

The Government, in other words, could have let Anglo go while saving the rest of the banking system.

Citing these conclusions in support of Government policy is bizarre. But even more bizarre is another claim that Lenihan makes in his reply: that “Merrill Lynch [ML] also recommended a blanket guarantee of Anglo Irish Bank, including, incidentally, subordinated debt.”

So far as I can see from the available documents, this is simply untrue.

Honohan’s reading of those documents is the opposite of what Lenihan contends: “There were arguments against a blanket guarantee, including one made by the Department of Finance’s advisers [ML], who observed that the assumption of such a large contingent liability would have an adverse effect on the borrowing costs for the State.”

The Department of Finance’s note of a meeting with ML on September 26th, 2008, (at which Brian Lenihan was present) states that “On a blanket guarantee for all banks – ML felt could be a mistake and hit national rating and allow poor banks to continue.”

By “poor banks” they presumably meant Anglo and Nationwide.

In this case, there seems to be only two logical possibilities. One is that Lenihan has access to a document containing advice from ML that has been withheld from Honohan and the Public Accounts Committee.

The other is that Lenihan or whoever in his department drafted his reply is making an untrue claim.

This stuff matters – to the tune of €22 billion – and it is terrifying to think that the Minister could make such mistakes.

Can I therefore ask Brian Lenihan three questions. Where, exactly (with page and paragraph references), does Honohan express support for a blanket guarantee for Anglo? Where, exactly, do Merrill Lynch support such a guarantee? And, back to the original question: how much money for Anglo is too much?

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