Brian Lenihan said bank nationalisation an 'awful risk' with 'no return' and then nationalised

Normally, it hardly matters who is running the country, no mater how incompetent. But right now it matters greatly because Brian Cowen and Brian Lenihan have bet the future of the country for a generation of a bank rescue scheme and there is grave doubt that they know what they are doing.

On the night of 29 September last Brian Cowen and Brian Lenihan met with departmental officials and came to a momentous decision: to give a blanket guarantee to all depositors and lenders to six named financial institutions. They took the decision on their own, without the involvement of the other cabinet members, who, Brian Lenihan has now told us, were “consulted incorporeally”. How this could meet the constitutional requirement that the cabinet meet and act as a collective authority escapes me, but that's another issue.

What is very much at issue is what the two Brians were advised and, again according to what Brian Lenihan told the Dáil last Tuesday, the only (italics) legislation which the officials put before them was a Bill, which “in all material terms (was) the same as the Bill before the house (last Tuesday)”, that is a nationalisation Bill. In other words the officials advised them to nationalise, at least Anglo-Irish Bank at that stage, instead of giving a guarantee to all the six financial institutions and that, at least initially, that was the only concrete proposal.

However Brian Lenihan has said everyone present, including the officials, agreed unanimously that the better course was the guarantee scheme.

Brian Lenihan said last Tuesday that they decided against nationalisation because “to nationalise one institution could have caused a systemic run on all other (financial) institutions”. If that was so on 29 September, how is it not so now – ie that the decision to nationalise Anglo-Irish may cause “a systemic run on all other (financial) institutions”.

On 30 September, the following day, he told the Dáil that the guarantee scheme was intended “to underpin the financial standing of the Irish banks and building societies”. On the previous day the shares in AIB were at €5, in the Bank of Ireland at €3.5.

On 18 December Brian Lenihan told the Dáil on the debate on the recapitalisation plan, that the guarantee scheme had been “very successful”. By then the shares in AIB were at €1.75, about a third of their price on 29 September and in Bank of Ireland at €0.8, less than a quarter of their price on 29 September and there was a liquidity crisis for businesses around the country.

However Brian Lenihan said “Irish banks have continued to do their business and all of our people and business have been able to deposit with financial institutions in confidence”. Nevertheless in spite of this success, it was necessary for the State to invest €10 billion in the banks.

On the following day, that is 19 December last, Brian Lenihan was asked whether there was an intention to nationalise Anglo-Irish Bank. He said: “Were we to go from the last step before nationalisation to nationalisation itself, the taxpayer will be taking an awful risk with no return.”

Last Monday night he announced the nationalisation of Anglo-Irish Bank.

He now says there is no question of AIB and Bank of Ireland being nationalised. But the share prices of these institutions as of last Thursday was €0.6 and €0.35 respectively.

AIB shares were at €17.3 on 3 January 2007. Bank of Ireland shares were at €17.3 also, as it happens. The shares in both institutions are now almost worthless and we are asked to believe that there is no crisis, that the final resort to nationalisation that was taken with Anglo-Irish Bank won't now have to be taken with them.

It now seems the guarantee scheme was a piece of reckless gambling which consigned the State to nationalising all the financial institutions guaranteed, whatever the scale of their bad debts and whatever the standing of the financial institution in the financial infrastructure of the State.

If instead of the guarantee scheme, AIB and the Bank of Ireland had been nationalised then or at least that the government had made it clear it would not allow AIB and the Bank of Ireland to go under,, the State's financial infrastructure would have been secured and we could have afforded to let Anglo-Irish Bank, Irish Nationwide and the others to go to the wall, at no expense at all to the State. Instead we have to bail all of them out.

It now emerges (again courtesy of Brian Lenihan last Tuesday) that Anglo-Irish Bank has 300,000 retail depositors or whom only 72,000 are Irish. In other words the guarantee scheme has guaranteed 230,000 foreign retail depositors. He number of corporate depositors is 12,000 or whom only 3,500 are Irish. Why did the State guarantee the deposits of 8,500 foreign corporate depositors? And why were we not told at the time of the guarantee last 30 September that 230,000 foreign depositors in Anglo-Irish were being guaranteed as were 8,500 foreign corporate depositors?

What was done on 30 September may turn out not just to be a blunder but a catastrophe. We have committed ourselves to guaranteeing the 230,000 foreign retail depositors and the 8,500 foreign corporate depositors in Anglo-Irish Bank and it would surprise nobody if that undertaking cost us in the region of €10 to €20 billion, given the scale of dodgy loans Anglo-Irish forked out to developers. And maybe another €10 to €20 billion on the basis of the guarantees given to the other financial institutions. If say a total of €30 billion transpires to be the scale of the bail-out, this economy and this society is done for over a very long time.

And is there reason for the slightest confidence in the assurances of Brian Lenihan and the others on how unworried we should be? The guy who said the nationalisation of Anglo-Irish would be “an awful risk with no return”?