Kevin Cardiff: How I remember the night of the bank guarantee

In his book extract the senior civil servant gives an insider account of the night in 2008

Kevin Cardiff was second secretary general of the Department of Finance from 2006 to 2010 and secretary general from 2010 to February 2012; he joined the European Court of Auditors in March 2012. This is an edited extract from 'Recap: Inside Ireland's Financial Crisis', published by the Liffey Press. All royalties from the sale of the book will be donated to Goal.

I still don’t know who called the meeting, but it was inevitable that there would be one that evening, given the events of the day. My boss, David Doyle, told me to be over at the taoiseach’s office by 6pm.

Representatives from the Central Bank, the Financial Regulator, Arthur Cox and others were in attendance at various points. Officials from the National Treasury Management Agency arrived a bit later, at my request. Some of the taoiseach’s own advisers were there too – Joe Lennon and Peter Clinch – and William Beausang from the Department of Finance.

At some point I became aware that the heads of the two biggest banks would attend later, though I never understood the meeting was called at their request, as has been suggested over the years in some media outlets. As I understand it, the two banks jointly asked to meet the Taoiseach, and this request coincided with a meeting between the official bodies concerned.


I was anxious to be in the room with the taoiseach – albeit just about the most “junior” person for a good deal of the time. It was important that someone be there who had participated in many of the working meetings over the past few days.

David Doyle and minister Brian Lenihan were there. Jim Farrell and Pat Neary from the regulator, and John Hurley and Tony Grimes from the Central Bank represented the Dame Street system. The Attorney General, Paul Gallagher, and a solicitor from Arthur Cox, Eugene McCague, were also in the room later. And of course the taoiseach attended himself.

I was nervous – I imagine everyone there was – but also somewhat relieved. At last, there was no more wait-and-see. The Taoiseach had called a meeting to make big decisions, his stature would count with the other players and we would get some direction for action.

I was confident that my team, with the Attorney General’s staff of lawyers and parliamentary drafters, could deliver any legislation required very quickly, as we already had prepared draft legislation which could allow for guarantees, special liquidity swap arrangements, nationalisation, direct loans and so forth.

Moreover, if there was a need to apply government money directly, the authorities had a ‘fighting fund’ of sorts arranged, so that taking cash and fungible securities together, as well as some limited scope to apply the Central Bank balance sheet, we could have many billions of euro ready at very short notice, perhaps as much as €20 billion.

* * * * *

The meeting – perhaps in truth best described as a rolling series of meetings – that took place that evening was businesslike and professional. I have seen the then taoiseach impatient and frustrated at times, but at this moment he was calm and in charge.

But he did surprise me quite early on. I had expected that we would discuss guarantees for banks among options – indeed, by then I thought that some guarantees were inevitable. But the taoiseach raised the issue of a broad pre-emptive guarantee early in the discussion. It seemed to me that he had a preference for this approach going into the meeting, or at least that it was the baseline approach against which every other option would be considered.

Brian Cowen has since made clear that he had not made up his mind as the meeting started, but it was certainly my impression at the time that his mind was formed quite early in the evening.

This was not the preferred approach of our advisers in Merrill Lynch, I was sure, and I stepped out of the room to send a quick email message to Merrill: "in meet with taoiseach – need note on pros and cons of guarantee a sap" (sic).

Of course, I already knew the pros and cons of the guarantee option, but I felt it was important that the meeting would have confirmation of Merrill’s position.

There was a lengthy discussion of the situation and the options, especially the guarantee option. Tony Grimes spoke about the funding position of the banks. John Hurley explained his understanding of the ECB and the European position.

He noted that the ECB president, Jean-Claude Trichet, had stressed that it was essential for European and Irish financial stability that there be no bank failures in Europe. But, more worryingly, Trichet had also confirmed that there was no European initiative in the works which might ameliorate the situation.

The Irish central bankers were also clear that their own balance sheet was not large enough to make large loans to Irish banks outside the framework of the European System of Central Banks and the ECB. They had been very insistent on the need to have Government funds available to lend to banks.

The financial regulator spoke about the current solvency situation of the banks, maintaining the position that they were solvent, if not without difficulties.

It seems to me in retrospect that while the Department of Finance representatives, including the minister, were more wary about the dangers of a broad bank guarantee, the Dame Street representatives (from the Central Bank and Financial Regulator) all strongly favoured the broad guarantee approach, on balance at least.

Minister Lenihan and I seemed to be the most concerned about possible downsides to this approach, but at some stage in the evening the minister’s views moved towards the consensus favouring the broad guarantee option.

I heard the explanation of this a couple of years later. The minister reminded me that the meeting had been suspended for a time so that he and the taoiseach could have a private discussion.

According to the minister, during that private discussion they decided to present a united front around the broad guarantee option. But so far as I can recall, they did not actually announce that but rather let the meeting move toward that position.

* * * * *

While all of the initial discussions in the taoiseach's office had been going on, Dermot Gleeson and Eugene Sheehy, chairman and chief executive of AIB, and Richard Burrows and Brian Goggin, chairman and governor of Bank of Ireland, had arrived and waited outside. They were asked to join the meeting.

They sat along one side of the table, the taoiseach at the head of the table on their left, the Attorney General, Minister Lenihan, myself, David Doyle opposite them, and others filling the rest of the table.

I had met Sheehy and Goggin in the past: both seemed very substantial, serious individuals. Sheehy was friendly, Goggin more aloof, but courteous. I had never met Burrows. My only previous direct encounter with Dermot Gleeson was in the formal setting of a commercial arbitration in which his client had sought compensation for losses they claimed to have incurred on currency movements after the introduction of the euro. I had been a witness for the public body they had claimed against, and Gleeson had cross-examined me. It was a nil-all draw, I think.

These bankers’ message was stark. They knew well how vulnerable were the weaker banks, like Anglo, and were careful to distance themselves from the Anglo position.

Sheehy described the market experience of that day. Both banks were finding it harder to attract funds. The willingness of market participants to make deposits or lend to Irish banks for longer periods, such as for one to three months, was greatly reduced, and the two banks were increasingly reliant on shorter-term funding – monies made available only for a day or a week.

Soon, they would find themselves in breach of regulatory guidelines governing the average “duration” of these types of deposits. Sheehy said that, for example, on one unsuccessful phone call seeking funds from an international bank, the AIB employee on the call had overheard a comment between two traders at the other end of the line: “No quote for Ireland.”

In other words, he argued, there would be no market differentiation between the Irish banks – all were being tarred with the same brush, and all would have funding problems. On their estimates, although both had substantial liquidity cushions, the circumstances were so extreme that even these two most substantial Irish banks might run out of funds in a matter of weeks.

They wanted a guarantee from the government in very broad terms, and they wanted insulation and differentiation from, in particular, Anglo, which they argued could only come from a nationalisation of that bank.

* * * * *

Taking these two banks at face value on their funding position, the situation now was that Anglo was already out of cash, ILP could be in a similar position by the end of the week and INBS was draining funds slowly but would eventually run out. The EBS building society would presumably also be infected. A worrying situation had become a desperate one in just a few short days. With the passage of time I no longer remember precisely every aspect of the sequence of events on that night. The bankers came in, gave their views, exited, and then were invited back for further discussion. But (and despite some suggestions contradicting some aspects, which I have heard since), the following is clear to me:

– They outlined the market position, and explicitly sought a very broad guarantee, providing suggested wording.

– They asked that Anglo be nationalised.

– I asked, for the benefit of the room, why we should guarantee existing long-term borrowings of the banks, and they responded in terms of ensuring a consistent message to the market, avoiding market differentiation, the negative reaction that would arise if existing lenders to banks were disadvantaged compared to new, pointing out that addressing the funding situation as it stood would require that existing lenders would also be new lenders.

– There was a discussion of how much the banks ought to pay the Government for a guarantee, and Eugene Sheehy suggested a risk-adjusted model such as the American FDIC12 charging system. This of course would have made the guarantee a very cheap arrangement from a banking perspective and certainly would not be anything like a “commercial rate” in the circumstances.

* * * * *

The bankers left the room, and the meeting continued in the light of their comments. In some ways their interventions had only added colour to the picture of the situation that had already been available to us.

Their suggestion that on current trends even the two big banks would run out of funds was in fact more or less self-evident, but their description of that day’s market activity was useful, and their pessimism added to the conviction that decisive steps were required.

In fact, theirs was not even a worst-case scenario. In the absence of significant official intervention, a failure of Anglo to meet any of its obligations would trigger events of default on many of its borrowings, so billions of euro would become payable immediately.

Anglo’s depositors would lose access to their money and the bank would close its doors. Depositors, large and small, would rush to take funds from the other banks, and international investors would withdraw from Ireland as much as they could.

The resulting recession would be unprecedented and the damage to the Irish economy and society would be long term and devastating.

So, in other words, there was never a realistic option for the authorities to step back from the situation and “let the banks take the hit”. A decision was required and the approach most favoured in the meeting was turning out to be that of granting broad guarantees to all of the significant Irish banks.

* * * * *

How was the guarantee framed? Well, first, there was a discussion on whether to include existing borrowings of the banks and existing deposits within the framework of the guarantee.

The question was simple enough in relation to deposits – most were relatively short term, and as soon as they matured would have to be replaced with guaranteed deposits, so a restriction on deposits was not likely to be very advantageous, either in keeping down the size of the government guarantee or in protecting the deposit base.

In relation to bonds of various types, the meeting accepted the bankers’ arguments that it was important to keep the bondholders on board to encourage the flow of new funds.

The term – or length of time applicable – for the guarantee was also discussed, and it was decided that two years ought to be enough, and that if problems persisted for longer then other mechanisms would have been found to address issues in the meanwhile.

I do not recall anyone arguing for a shorter period, although my notes suggest that the Financial Regulator had a certain minimum period in mind, and indeed given that the tone of the meeting was to make a decisive demonstration of support for the banking system a very short-term guarantee might have been counter-productive.

* * * * *

At some stage later in the evening, David Doyle, seeing my unease [with the general strategy], asked me directly my view on the appropriate approach.

I did not know then, and do not know now, what was the best approach – indeed, there are so many counterfactual possibilities to be considered that I think that question can never be answered. The broad guarantee as granted, or with adjustments, might well have been the best decision to take. However, that was not my recommendation on the night in question.

I addressed the taoiseach directly (I am not sure if Minister Lenihan was in the room at the time; I certainly don’t remember any reaction from him on this point).

I said that in my view we should “take Anglo out”, meaning that Anglo should be taken over by the State, that there would have to be guarantees granted to keep Anglo funded, and that we should make soft guarantees in relation to the other banks.

By soft guarantee I meant that we should make solemn assurances to the market about the support the government was prepared to give to the banking system, but not to make them legally binding.

The taoiseach was not disposed to entertain my views on this, either then or later when I reminded him that if there were to be a nationalisation it would take some hours to organise, so that any such decision would have to be taken as quickly as possible.

It is not possible to say whether the approach I recommended would have been any better than that which was in the end followed. What was certain was that there were huge risks which had to be addressed in a decisive way.

It is important to remember that the question for the meeting at that stage was not which options might on balance be the best and least costly. So long as there was a risk – and there certainly was one – of a real economic disaster in the following days, the question became which approach had the best chance of staving that off.

Each of us, I am sure, was concerned that a misstep that night could lead to closed ATM machines, lost cash, lost jobs and huge disruption to the lives of our community in a matter of hours or days.

So it is easy in retrospect to analyse the situation and say there were better options. On the night, or indeed for some time beforehand, finding the neatest, most elegant, cheapest option was, well, rather beside the point.

* * * * *

Once the main decision to grant the broad guarantee had been made, the level of movement in and out of rooms and corridors went up considerably.

There was a lot to be arranged. The press release, in which the key elements of the decision would be presented, had to be drafted. An incorporeal government meeting – a consultation of government members by telephone – had to be arranged. Work had to commence on adapting the legislation. And preparations had to be made for breaking the news to our international partners first thing the next morning.There was a lot of work yet to be done that night.

One particular concern to me was the instruction I had received for the drafting of the press statement and government decision. As I was sent out to start drafting, I was told to stick as closely as possible to the drafting suggested by the banks, since this was their area of expertise.

I thought, however, that the wording suggested by the bankers was at best likely to be less clear, and at worst would have a different meaning, to that which we intended.

I told the taoiseach that I thought the bankers’ wording was inappropriate, even disingenuous, and I said to him that if we used it, “the bankers will be in there laughing at us”, or words very close to that. I explained that I felt that without changes we would be committed to guarantees still broader and longer lasting than we intended.

The taoiseach took the point, and the drafting from that point on was our own.

* * * * *

While there is a good deal of consistency among witnesses at the banking inquiry on the basic facts of what happened that night, there have been some differences in the detail.

I cannot reconcile them all and do not feel that I need to. This is my perspective and, having checked my facts where I could, this is how I recall those events. Moreover, all of the people in Government Buildings that evening had their part to play, so naturally there will be elements of their stories not reflected in mine.