Updated at 13.20pm
AN ECONOMIC COMMENTATOR who became a defacto advisor to Brian Lenihan in the lead-up to the controversial bank guarantee said he felt “very sorry” for the then-finance minister.
Former Central Bank economist David McWilliams, an early predictor of the Irish property bubble, told the Oireachtas banking inquiry Lenihan first arranged to meet at his house in September 2008 after the pair were on the same TV panel.
“It was well after midnight; I had never had a politician in our house … I certainly never had a minister in my house,” he said.
“We kind of had a little panic where my wife said you’d better go and buy some biscuits, so I found myself at Centra in Ballybrack buying some digestive biscuits and some milk.”
McWilliams said he ended up having about a dozen phone conversations and two meetings with Lenihan around the time of the bank guarantee.
The Fianna Fáil minister was suspicious about the advice he was getting and needed to buy time to deal with the financial crisis, he said.
“I felt very sorry for him in a way because it would be a bit like me being elevated to attorney-general in the middle of the biggest constitutional crisis the country has ever faced.”
McWilliams said they talked about both a bank guarantee and a government takeover of terminal banks, but he thought the best option would be a “bail-in” of bondholders and other bank creditors.
“(Lenihan) said ‘could nationalisation of one of the smaller banks work?’; I said: ‘it could, but it won’t stop a bank run’,” he said.
We have to be very clear about what we are trying to do here – what we are trying to do here is prevent a national run on the banking system. If you nationalise a small bank, what signal does that send – it says this bank is problematic. In a panic does that say don’t worry the rest are fine?”What I said to him is ‘if you don’t know the facts how do you know that the next problem you’re going to have is one of the bigger banks’, which subsequently turned out to be the case.”
Lenihan, who died in 2011, contradicted some of McWilliams’ version of events in a 2009 interview during which he claimed the TV personality had been the one who insisted they meet up for a “discussion about the economy”.
Guarantee ‘a cloak to protect creditors’
About the same time McWilliams started writing articles in favour of a bank guarantee, although today he said he only supported a limited pledge to make people feel their money was safe.
“I became worried that what I thought was going to be an emergency measure to protect depositors was going to end up being used as a cloak to protect bank creditors,” he said.
After their last meeting on 4 October, McWilliams said their contact became sporadic and he felt like an “outsider” again as it became clear the government’s attitude became “we are going to pay everything”.
“At no stage did I ever imagine that subordinated (or junior) debt would be included (in the guarantee),” he said.
It has much more of the characteristics of a share than a bond and the reason is you get paid more to hold this subordinated debt so you are being paid for the risk. And if you’re being paid for the risk over and above everyone else, when the risk materialises you can’t expect to be paid in full.”
‘Set up to fail’
Earlier McWilliams said the economy was “set up to fail” in the lead-up to the financial crash and he had shared that view with anyone who would listen in various newspaper columns and TV interviews.
“I consistently warned people at every juncture that our property market was a credit bubble … and it wasn’t a matter of if it bust, but when it bust,” he said.
McWilliams, who is credited with first applying the term “ghost estates” to Ireland, said the policies of regulators and the government between 2000 and 2008 were “pathetic” as it should have been clear to anybody with the right training that the property market would implode and take the banks with it.
“The Irish property crash and the banking crash were both incredibly predictable and absolutely preventable,” he said.
This was not isolated thinking. I believe that many, many thousands of ordinary Irish people could see that this was coming. I can’t tell you the amount of times I went to bars and pubs and talked to people and they said this isn’t right.”
‘Unpatriotic’ thinking
But McWilliams said he was never contacted by a single government advisor, minister or civil servant about his views before the crash – instead he was accused of being “unpatriotic” for talking down the economy.
“We just said ‘it will be grand’ … and we were condemning ourselves to run out of options when the crisis happened,” he said.
The more we ignored, the more likely we were to end up with a situation where the choices weren’t the best of good and bad, it was the best of bad and worse.”
McWilliams said he ultimately blamed the banks for being the ones which “started the fire” through their rampant borrowing to fuel more lending after using up customers’ deposits, although the government had allowed them to run wild.
“Light-touch regulation means that you’re guaranteeing that you almost make certain that the banking sector is going to implode,” he said.
In Ireland we have an inability to accept reality. It’s a national issue. In a crisis the most important thing is to define your reality not as you would like the world to be but as it actually is. Then you can do something about it. In Ireland it struck me that all the way through, 2007, 2008, the official policy was to delay and pray.”
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