More WTF than Why: How to Frame the Wrong Question about the 2008 Bank Guarantee

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Fintan O’Toole has some interesting questions that he suggests any future banking inquiry should tackle, but won’t. The questions are worth considering because they illustrate a systemic trend regarding the class nature of Irish politics and the underlying cause of our regular banking scandals. I provide some information but not answers to these questions here. However, one of the final questions suggests that despite providing an indication of a pattern of behaviour which, if examined properly would bring us closer to a fuller understanding of how Irish society really operates, he actually hasn’t a clue.

“Why were there no prosecutions or disbarment of directors after the Dirt inquiry found in 2001 that the banks had engaged in a massive fraud on the State?”

Well, Irish Revenue knew since 1976 that offshore tax avoidance by Irish residents was occurring. In 1985 the Irish government created DIRT legislation to tax deposits, but guessed at the time that 25% of those with deposits in Ireland were using fake addresses to avail of Irish banks non-residents account facilities – tax dodging in short. Note, that was a guess, they had no idea how big it was as officials assured banks that they didn’t want to frighten away genuine foreign depositors who were using Ireland to avoid tax in their own country. They did nothing until 1998 when the story broke after an Irish banker got into a professional spat with another banker and somehow his claim, made in 1991 that AIB was liable for £100m in unpaid DIRT tax got into the papers. Incidentally, in his book which he published after the reports and the DIRT scandal broke he admitted that he pulled the £100m figure ‘out of his ass’. AIB finally settled with Revenue for £98m. There were several tax amnesties in the 80s and 90s, yet often the money held in these account was not declared, as an inquiry into the DIRT scandal revealed.

“What was the effect on the regulatory culture of the discovery by Central Bank officials that both a serving taoiseach and a member of their own board were involved in the Ansbacher scam, operated by one of the banks they were regulating?”

This has to do with the behaviour of the bank Guinness & Mahon Ltd, which the Central Bank of Ireland discovered was running offshore accounts organised by Des Traynor, close friend and advisor to Charlie Haughey, and someone who helped many, many rich Irish people keep their money offshore to avoid tax. When asked at a Tribunal why they didn’t try to stop it when it was discovered this is what the Central Bank official said:

“A senior Central Bank official told the tribunal that if they had gone after Des Traynor, depositors would have lost money. In evidence, Mr Adrian Byrne, now banking supervisor with the Central Bank, said that the Bank was faced with two options after an on-site inspection of Guinness and Mahon revealed a loan scheme designed to evade tax. It could have revoked the bank’s licence, or it could have demanded the resignation of certain directors. He said that either course of action would most likely have led to the bank’s collapse and depositors would have lost money.

Mr Byrne went on to say that the Central Bank’s priority was to safeguard depositor’s funds and to avoid the bank’s collapse. He explained that another bank, Irish Trust, had collapsed in 1976 and the Central Bank did not want that to happen again.”

Sound familiar? It would do everything, include hide the fact that a bank under its supervision was breaking the law, just to stop the bank collapsing? Unbelievable, isn’t it? The claim given that the priority was safeguarding ‘deposits’ is strikingly familiar to the one given to explain why an unlimited guarantee was provided for Irish banks. Ireland was the first of the EU countries to increase deposit protection from 20,000 euro to 100,000. 10 days later it guaranteed everything. In the Guinness & Mahon case we know corrupt behaviour was allowed to proceed because of the power that the perpetrator, Des Traynor, wielded. What was the reason for the protection of Anglo Irish Bank and Irish Nationwide? Was to protect certain ‘depositors’ who used that bank? More questions.

This is what Fianna Fail leader, and member of the Cabinet in 2008, Michael Martin had to say about the guarantee yesterday:

“Recalling the events before the decision was announced to guarantee the banks, Mr Martin said: “At the time it was fundamentally about liquidity. That was the diagnosis of the problem at that time and in essence you had one shot at it and in terms of the guarantee it was to ensure confidence to get deposits – remember deposits were fleeing out of the country.”

At the time it was NOT fundamentally about liquidity. It was about solvency – the guarantee was provided on the weekend before Anglo ran out of options. It was enacted while the money markets were closed and they knew that Anglo wouldn’t have been able to operate in business another day. The Anglo tapes reveal that the bank was already in breach of its banking license and the conditions under which the Central Bank could give it support (conditionality that if the Irish Central Bank reported it to the ECB under ELA rules, as it had to, would under normal circumstances have been enforced by the European Central Bank who consider the protection of the Euro to be their utmost priority). The Irish government thought that providing an unlimited guarantee – a guarantee for everything – would allow all Irish banks to continue to get cheap money from the US capital markets and remain in business (and avoid that ‘credit crunch’ happening elsewhere – they even be able to continue paying dividends to shareholders!).

So O’Toole, having framed a series of probing questions, backed by verifiable facts which illustrate a pattern of predatory behaviour by a class pursuing its interests exclusively and to the detriment of wider Irish society, then poses the question for the fantasy banking inquiry:

“What, in detail, was the role of the ECB in insisting that Anglo and Irish Nationwide be given unconditional guarantees for all liabilities?”

Insisting? Where did he get that from? Has he not just accounted for why an Irish government would do it, based on its previous lax attitude towards private Irish banks? Where is the evidence that the ECB insisted that Anglo and Irish Nationwide be given unconditional guarantees? Is O’Toole suggesting that an unconditional blanket guarantee was a wise option for AIB and Bank of Ireland, even though no other European country extended such a guarantee to their banks, under any circumstances? If the ECB insisted, why, when Greece tried to provide an unlimited guarantee for its banks following Ireland’s announcement were they told not to and immediately withdrew the proposal? Why did the ECB, in their comment on the announcement criticise the Irish government for acting without consulting their European partners beforehand?

I can only assume that O’Toole, like so many others trying to figure out what went wrong, is conflating the 2010 bailout with the 2008 guarantee. Why he would do so, even though there is nothing to back up such a suggestion will remain as another one of those difficult unanswered questions.


Photo courtesy of Des Traynor from RTE news which was reporting on the tax settlement of €4m with Des Traynor’s estate in 2007.