NOBODY LIKES TO get a call from the boss when they’re still in bed.
Exactly ten years ago, in the early hours of 30th September 2008, I got such a call: one I’ll never forget.
From January 2008 to the general election of February 2011, I was, among other things, economic advisor to Joan Burton TD, then opposition Finance Spokesperson for the Labour Party.
As such, I had a front-row seat to the political theatre and economic tragedy of Ireland’s unfolding banking crisis.
A little context
Speaking before the Finance Committee in January 2008, when then Central Bank Governor John Hurley and then Financial regulator Patrick Neary together presented the unfortunately-named Financial Stability Report for 2007, Joan had warned that Ireland was caught up in a ‘perfect storm’ of volatile financial markets and over-lending to property developers.
Her concerns were dismissed, as were those of a small minority of prescient economists in the preceding years: accused of ‘talking down the economy’ and invited to ‘commit suicide’ by the Fianna Fáil government of the day.
By late-September, of course, we had already seen the St. Patrick’s Day massacre when Irish bank shares plunged and the collapse of Lehman Brothers only two weeks previously. Concerns had for some time been mounting about the fate of the Irish banks, which had begun to bleed deposits.
So, sometime after 6am on 30th September, Joan called to relay the overnight developments. In the early hours of the morning, Finance Minister Brian Lenihan had briefed her on their plan: the now-infamous bank guarantee.
My first reaction:
That’s insane… did they guarantee everything? “Yes, everything”, came the reply. “Insane”.
I hustled into my office on Kildare Street and prepared to give a more reasoned analysis.
Cost versus risk
Not just all customer savings deposits: the guarantee covered essentially all new and existing debt, up to and including the famed ‘subordinated bondholders’. With the rules of capitalism turned on their head, even speculators in high-risk, high yield investments were to be made whole. Almost the entirety of the Irish banking sector’s balance sheet was to be underwritten by taxpayers.
What the government failed to distinguish was the difference between ‘cost’ and ‘risk’. So, yes, the initial ‘cost’ was minimal. The government and the guarantee cheerleaders even expected at that time to make money by charging the banks a fee for the privilege of a taxpayer guarantee. But the risk was enormous: €440 billion in liabilities, nearly 3 times the country’s GNP at the time.
It would later transpire just how farcical had been the scenes of the ‘night of the bank guarantee’: Green Party leader and Environment Minister John Gormley roused from his slumber to participate in a cabinet meeting by phone. “Are we going with the David McWilliams option?”, he is reported to have asked. They were.
The bank guarantee was not entirely out of the blue, of course. One of those few economists prescient enough to have seen the housing bust coming was David McWilliams. In two newspaper op-eds in the second half of September, he had called for a blanket bank guarantee for all bank creditors – everyone bar shareholders.
Lauded by Finance Minister Brian Lenihan as the “cheapest bank bailout in the world”, on the morning of 30th September 2008, we still didn’t know for sure, of course, just how much the bank guarantee would ultimately cost us.
To be fair, even a decade later, we still don’t know the final cost to taxpayers of bailing out the banks. Not until Nama is wound down and the remaining banks privatized will the true cost be apparent. But, the final bill will undoubtedly come to the tens of billions.
Opposing the deal
Having been earlier to the game than most of her political colleagues in warning of the huge potential risks on the banks balance sheets, Burton was instinctively skeptical about taxpayers taking on such a risk. Over the coming hours, her small team of advisers fleshed out a clear economic and political rationale for calling the government’s bluff and opposing the bank guarantee.
Despite Joan’s instincts and her advisers’ analysis, Labour’s opposition to the bank guarantee was far from a sure thing. Party Leader Eamon Gilmore needed to be convinced, while several of Labour’s other ‘big beasts’ were much more sanguine on the proposal.
During the day, holding statements were issued, calling for more information, but not revealing our hand before the guarantee legislation had even been published. In truth, Labour’s position was in the balance.
Politically, it was a big risk. Swimming against the tide always is. But ultimately, Gilmore put his faith in his Finance Spokesperson who had trained as an accountant. Together, they convinced the rest of the parliamentary Labour party.
It may be an easy call with the benefit of hindsight, but one must remember the intense political pressure to fall into line and ‘pull on the green jersey’. Writing a blank cheque bank bailout was being sold as the patriotic thing to do. Labour would ultimately become the only Party to oppose the guarantee when it first came before the Dáil later that evening. Sinn Féin were somewhat affronted, suggesting that they should have been given the courtesy of a heads up that Labour was actually serious about opposing the guarantee, not just posturing.
I wish we had been wrong
What became painfully clear over the coming weeks and months was just how right we were, and how deeply in over their heads were the government, both political and permanent. At briefings, senior public servants would nonchalantly reveal the spiraling cost of having the bank guarantee called: sometimes tens of billions greater than at the previous briefing.
The most widely-cited cost of the bank bailout is €64 billion, though it is likely to be less than this when all is said and done. But, it undoubtedly tipped the scales in forcing the country into the clutches of the troika and their prescription of austerity.
In truth, the banking crisis had become so acute by September 2008 that doing nothing was not an option. There was no cost-free solution that would also restore confidence in the financial system and ensure ATMs didn’t run out of cash. For example, Labour had already called for an increase to €100,000 in the amount of customer deposits that would be guaranteed by the State and had supported government legislation to that effect in recent weeks.
But, the government fell victim to the ‘do something fallacy’: we must do something; this is something; therefore, we must do this. And the so-called ‘David McWilliams option’ was certainly something! The government wouldn’t listen to calls for a more limited guarantee, rejecting opposition amendments to exclude certain categories of creditor, for example. They plowed ahead with what would ultimately prove to be the most expensive approach possible.
Amid the hubris of the time, the blanket guarantee was billed as an Irish solution to an Irish problem and a model of financial innovation that other countries would surely follow. It was a fateful decision the country has come to regret at leisure ever since.