System caters for the elites and no one else

Merrill Lynch warned against the guarantees that the government provided the banks. By Vincent Browne.

On September 24, 2008, the government asked Merrill Lynch to advise on the options in dealing with the emerging Irish banking crisis.

At 6.43pm on Monday, September 29, 2008, the night of the bank guarantee, Henrietta Baldock, managing director of investment banking at Merrill Lynch - one of the few women in senior positions in the financial world - e-mailed another high-flyer, Kevin Cardiff, the then head of the Department of Finance’s Taxation and Financial Services division, and now Secretary General of the department. She attached the 24-page Merrill Lynch report in her e-mail.

(Picture: Michael Somers, former head of the NTMA)

In their report, Baldock and her colleagues noted: ‘‘The Irish financial sector is experiencing extreme difficulties, with wholesale market access all but non-existent’’.

However, they also said: ‘‘All of the Irish banks are profitable and well-capitalised [but] liquidity could run out in days, rather than weeks’’.

They added: ‘‘The important issue is for the government to preserve the stability of the Irish financial system and to safeguard the interests of individual bank customers to avoid widespread panic. That said, there is a limit on the financial resources available to the government and there may be a need to preserve firepower as events unfold.”

They considered a range of solutions and remarked: ‘‘All solutions require financial resources from the government and could add pressure to the sovereign credit rating and the borrowing costs of the Irish government.”

Referring to the option of the state offering a complete guarantee to all depositors and senior creditors in the six major financial institutions here, they said: ‘‘The scale of such a guarantee could be over €500 billion. This 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. It might also be perceived by other European states if they come under pressure to do the same as liquidity flows migrate. A coordinated response across Europe could make this option more viable.”

Michael Somers was later to complain about the engagement of Merrill Lynch at all, as well as about the fees they charged for the five-day undertaking.

But someone, somewhere in the government, or in the Department of Finance, thought it a good idea to invite Merrill Lynch to give its opinion.

A few hours later, Brian Cowen and Brian Lenihan ignored the report’s recommendations, and gave the complete bank guarantee that Merrill Lynch had warned against.

Now we find that, precisely as Merrill Lynch had projected, Ireland’s sovereign credit rating has taken a hit because of the scale and emerging cost of the guarantee given to the banks.

This is going to cost us dearly and, although the reports seen by the two Brians in the run-up to that decision have been disclosed, we have no idea why they chose to go for the riskiest option open to them, having been warned that this could prove disastrous.

And so it has happened.

Last Wednesday, Standard & Poor’s, the credit rating agency, lowered Ireland’s credit rating.

A n inevitable consequence will be to raise the cost of borrowing, precisely when we need to engage in a lot of borrowing both to fill the €20 billion fiscal deficit and to keep the banks going. Standard & Poor’s did so because it now believes that the cost of the bank bailout will be in the region of €90 billion.

Remember how, in September/ October two years ago, when the bank guarantee had been given, we were told by the two Brians and other ministers that the cost of the bailout would be zero?

Remember how they even speculated that the country might make a killing out of it?

The reality was that no one knew how bad all this was going to be. 

They still don’t.

Although the data from the US and Britain over the last few days is encouraging, there remains the prospect of a double dip and a further collapse of major economies, on which we rely to drag us out of our recession.

The apprehension must be that we will have another dip; state revenues will fall back again; borrowing will escalate at a huge cost, and the government will refuse to impose tax hikes on the richer classes that clearly they (we) are able to afford.

We remain one of the richest countries in the world. But, because of our dysfunctional political culture, this reality is ignored.

The state is starved of financial resources and we head into a crisis where (as always) the worst effects will be inflicted on those least able to bear them.

This has not happened because of misfortune or international forces affecting us.

It happened because of calculated government policy that ravaged the tax base, inflated a property bubble that brought down the banks, and then deferred (again, as always) in a panic to the world’s financial elite.

That elite has now turned on us, even when its high priests, the likes of Henrietta Baldock ,warned us to be careful and restrained.

Well done, one and all.