Banking inquiry: Cardiff to challenge Trichet evidence

Kevin Cardiff's submission to the Oireachtas banking inquiry brings a new perspective to the turmoil which brought Ireland's banks and then the State to the brink of failure.

Cardiff, due to give evidence this week, has delivered a mammoth 380-page report to the inquiry in which he sets out his assessment of the drama surrounding the bank guarantee and the EU/IMF bailout two years later.

These were complex, high-risk events in which political leaders and officials laboured amid profound uncertainty over the outlook for the banks and the State.

Cardiff was in charge of the Department of Finance unit which had oversight of banks on "guarantee night", September 29th/30th 2008, placing him close to the late Brian Lenihan, then finance minister, and Brian Cowen, then taoiseach, when the fateful decision was made.

Nationalistion

In November 2010, when

Ireland

reluctantly accepted external aid from

Europe

and the IMF, he was secretary general of the department.

Although the story of the headline events is well known, Cardiff's report – seen by The Irish Times – pinpoints antecedent moments which thrust Ireland further and further into crisis.

His account of the guarantee begins with a phone call on Friday September 5th, 2008, about an "incorrect" story by Reuters on the troubles of Irish Nationwide Building Society.

Fearing a "run" on INBS, a meeting of top officials was convened in the Central Bank the next morning.

It was the first of many, as the Lehman Brothers collapse thrust the world's financial system into chaos.

“In the next months, the same group of people, and a few more, would consider the potential for meltdown of the entire Irish financial system – and not just the Irish one – develop a range of options for decision by the Central Bank and by the Government, not a single one of them attractive,” Cardiff writes.

The guarantee followed many months of ever-increasing strain. Cardiff says there was no serious consideration of a broad guarantee in the first half of 2008 and he was surprised it emerged so quickly as an option on guarantee night.

“But the taoiseach raised the issue of a broad pre-emptive guarantee quite early in the discussion. It seemed to me that this was going to be the baseline approach against which every other option would be considered,” he writes.

“The minister for finance and I were more cautious about the broad guarantee option, noting that on its own it could not solve all the problems of the banks, and indicating that other options should be considered, including nationalisation of Anglo.

“At some stage in the evening, the minister’s views moved more towards the consensus favouring the broad guarantee option. The minister told me some time later that during a pause in the meeting, when he and the taoiseach had left the room to speak privately, he agreed with the taoiseach to follow the broad guarantee approach. He did not use the word ‘overruled’ but rather indicated that he thought it important that he and the taoiseach presented a common political position.”

Present that night were Dermot Gleeson and Eugene Sheehy of Allied Irish Banks, and Richard Burrows and Brian Goggin of Bank of Ireland. "[The two large banks] wanted a guarantee from the Government in very broad terms, and they wanted insulation and differentiation from, in particular, Anglo, which they argued could come from a nationalisation of that bank."

The bankers even provided a suggested wording for the guarantee.

“I was asked to produce drafts of the final announcement, based on the banks’ wording – I believed that this wording was broader in a number of respects than had been understood by the official parties and I told the taoiseach in a side conversation that if we accepted their wording the banks ‘would be laughing at us’ or words to that effect – the taoiseach immediately asked me to ensure the draft reflected the understanding of the official parties as to the decision taken, rather than the banks’ draft.”

Secret

There had been contacts at the time with the

European Central Bank

(ECB). Cardiff’s understanding was that Jean-Claude Trichet, then ECB chief, was “personally” aware the day before the key meeting of the Irish banks’ difficulties.

“It seemed clear at the time that the message Mr Trichet had for the Irish Government was the one being passed via the Central Bank governor: that it was very important that governments prevent their banks from failing, and that there was no concerted European initiative in prospect.”

Of Ireland’s entry into the EU/IMF programme two years later, Cardiff professes deep annoyance at “anti-democratic” reports of an Irish bailout emerging from a G-20 meeting in South Korea.

“Someone over there, at a forum where Ireland was not represented, was apparently taking it upon themselves to announce a decision Ireland had not made,” he writes.

“Messages came from all around. Parliamentary questions were put down – is it true that Ireland is currently negotiating a bailout? Dan Mulhall, the Irish ambassador in Berlin, spoke to a high ranking German official, later a senior figure in the Brussels system, who had been given the same story.”

As for the deal which was eventually struck, Cardiff confidently dismisses “one big fallacy” in Trichet’s claims about the ECB’s rejection of the Irish plans to impose losses on senior bank bondholders. Trichet claimed this was “simply” a matter of advice, but Cardiff said this was a mis-characterisation.

“Unless all our information was wrong, the ECB actively engaged in an international discussion and was, though not on its own, directly influential in forcing the hand of Ireland in relation to the issue of burden sharing for senior bond holders. Yes of course, it was formally Ireland’s decision, but it was far from Ireland’s preference.”

Indeed, Ireland had made secret preparations to take the alternative route.

“Specialist legal expertise was quietly brought into Ireland to advise on how to make the burden-sharing process work, and our own legal advisers were working on the matter also. It seemed feasible, despite some significant legal obstacles, to impose some losses on senior bondholders, but [this] could not work if the European partners and the Commission were opposed.

“At the time, we were led to believe that Dominique Strauss-Kahn, head of the IMF, was not only in favour of this approach but believed he could persuade other major players in world finance, including the major European governments, the Americans and the ECB to go along.

“Strauss-Kahn was to, and did, convene a conference call to pursue this arrangement. There had even been early indications of a positive hearing from US treasury secretary [Timothy] Geithner.

“We heard back, however, via the IMF team in Dublin, that instead of a positive response, there had been a strong negative reaction from the ECB and from Geithner and others, and that the programme would not go ahead if senior bond-holder burden sharing was contemplated.

"This was confirmed by European Commission and ECB negotiators in Dublin and the IMF negotiators despondently confirmed that this was now also the official position of the IMF. So it is not fully true to say that the IMF was in favour but the others were not – after that international phone call, the troika parties adopted a single position."

Key points from Cardiff’s submission

- On “guarantee night” Brian Cowen raised the issue of a pre-emptive guarantee early in the talks. Brian Lenihan was “more cautious”, but later agreed with Cowen because it was important the Taoiseach and the minister for finance presented a common position.

- Allied Irish Banks and Bank of Ireland both wanted a government guarantee in very broad terms that night and sought nationalisation of Anglo. Ultimate guarantee was based on modified version of banks’ proposed wording .

- It only later emerged that Sean FitzPatrick of Anglo had been to visit at least one of the big two banks that day, asking the larger bank to take over Anglo. “If true, it is difficult to explain in retrospect why this rather salient piece of information was not passed on in the meeting with the Taoiseach,” Cardiff says.

- Jean-Claude Trichet accused of “one big fallacy” by saying ECB “simply” gave advice in relation to its refusal to accept losses being imposed on senior bank bondholders.

- Ireland was “led to believe” that Dominique Strauss-Kahn, chief of the IMF, was in favour of burning senior bondholders.