Consultants' advice raised fears over bank scheme


The final piece of written advice given to the Government by outside consultants Merrill Lynch in the run-up to the bank guarantee recommended a €20 billion emergency lending fund and highlighted serious concerns about a blanket guarantee.

Minister for Finance Brian Lenihan said the 54 documents, published by the Dáil Committee of Public Accounts, supported the Government’s decision to introduce the guarantee in September 2008.

However, Fine Gael’s finance spokesman Michael Noonan said the documents showed that Merrill Lynch were against a blanket guarantee and told Mr Lenihan this days before the guarantee was chosen.

Merrill Lynch was hired by the Department of Finance on Wednesday, September 24th, 2008, and they produced an advisory memo for Government four days later, on Sunday, September 28th.

This was the last of a series of documents released by the Government covering the days running up to the introduction of the guarantee on the night of September 29th.

It warned about the potential downsides of a blanket guarantee and leaned towards a combination of alternative measures, including the €20 billion emergency loan scheme.

While a guarantee would stem the outflows of deposits from the banks, the scale of the guarantee could be in excess of €500 billion, the advisers warned. The Government ended up covering liabilities of €440 billion.

The guarantee “would almost certainly negatively impact the State’s sovereign credit rating and raise issues as to its credibility”.

“The wider market will be aware that Ireland could not afford to cover the full amount if required,” Merrill Lynch said in the memo.

The same document, which reviewed other options for the State, said there was “no right or wrong answer” to the crisis the Government was facing. The only option Merrill Lynch definitively ruled out was allowing a bank to fail.

At a meeting on Friday, September 26th, 2008, Mr Lenihan was told by Merrill Lynch that a blanket guarantee “could be a mistake” that would allow “poorer banks” to continue in business.

Mr Lenihan last night pointed out that a document produced that same day by Merrill Lynch, which reviewed the options available, described a blanket guarantee as the “best/most decisive/most impactful from market perspective”.

“In the context of rapidly deteriorating circumstances on the night of the September 29th,” the Government decided in favour of this particular option, Mr Lenihan said.

“It is wrong to suggest that Merrill Lynch recommended one option over another. Indeed, the only option which Merrill Lynch discounted, after full consideration, was the option of allowing an Irish bank to fail. This is the option that Fine Gael has advanced since 2009,” Mr Lenihan said.

Alternative options suggested by the advisers, such as limiting the guarantee to Anglo Irish Bank and Irish Nationwide while taking those institutions into State control, also contained enormous potential negative outcomes, the advisers said.

The Taoiseach said there were a number of options set out by Merrill Lynch. He said the recent report by the Central Bank governor, Patrick Honohan, “confirmed the blanket guarantee was the way forward”.

Mr Noonan said the documents showed the department’s then secretary general David Doyle warned that the banking system potentially faced not just a liquidity but also a solvency crisis.

“The very next day Merrill Lynch’s top advisers, hired by the Government at great expense to advise on the crisis, recommended against a blanket guarantee at a meeting attended by the Finance Minister,” Mr Noonan said.

The Government paid Merrill Lynch €7.3 million for its advice from September 2008 to June 2009.