Bank Guarantee Scheme: Examination of Department of Finance Papers Supplied on 8 July 2010

Thursday, 22 July 2010

Committee of Public Accounts Debate

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Mr. Kevin Cardiff (Secretary General, Department of Finance)called and examined.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I welcome Mr. Cardiff and his officials. This meeting has been convened to consider the 2008 annual report of the Comptroller and Auditor General, chapter 7 — banking stabilisation measures (resumed) and also to examine the Department of Finance papers supplied on the bank guarantee scheme.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to the committee. If witnesses are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the long-standing parliamentary practice to the effect that, where possible, they should not criticise or make charges against a Member of either House or any person or persons outside the House or an official or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the provisions in Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policy or policies. They are also reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I now invite Mr.Cardiff to introduce his departmental officials and make his opening statement.

Mr. Kevin Cardiff:  I am accompanied by Mr. William Beausang, assistant secretary, and Mr. Kevin Nolan, assistant principal officer. Ms Ann Nolan, assistant secretary, is attending a European teleconference on stress testing and will join us as soon as is possible.

I am pleased to discuss with the committee the documents recently provided for it by the Department on the bank guarantee and the crisis in the financial system. As this is the first public session during which the committee will discuss the documents released to it by the Department on the bank guarantee and the workings of the domestic standing group on financial stability, I will outline the approach taken by the Department to the committee’s request for these documents. I note from the committee’s press release issued yesterday this is one of the issues it wishes to deal with at this meeting.

In assessing how it should respond to the committee’s request for documents the Department had to deal with issues of Cabinet confidentiality, legal privilege, broader confidentiality requirements and the ongoing commercial sensitivity of information, in particular, as it relates to individual institutions. Notwithstanding the fact that we are somewhat constrained by all of these considerations and the usual restriction that civil servants may not comment on policy, we have sought to be of real assistance to the committee. We understand the importance of its role and the public interest in that role, which is to deal with the constitutional obligation of the Dáil with regard to the expenditure of public moneys. The committee asked for a paper on the bank guarantee and we contrived to provide dozens of papers which we regarded as important in order to put the paper on the guarantee in context.

In releasing documents to the committee we took account of the fact that some of the information considered commercially sensitive at the time of its production could no longer be so regarded owing to the passage of time and the amount of information on financial institutions which had benefited from State support already in the public domain. Where it was not possible to release a full document, we endeavoured to release documents in part. I do not think the redactions have caused a significant loss, at least in the general sense of what happened. It may also be the case that, having considered all of these issues of confidentiality and sensitivities, the release of the documents facilitates a broader public discussion.

The report undertaken by Mr. Klaus Regling and Mr. Max Watson and the report compiled by Professor Honohan have drawn attention to a number of significant issues which require further consideration, including bank practices, risk management and governance failings in the covered institutions, the performance of the Central Bank and the Financial Regulator, the role of fiscal policy and the overall macro-economic management of the economy. We are all aware that these matters are not being ignored by the Oireachtas or public agencies. Mr. Peter Nyberg, former director general for financial services at the Finnish Ministry of Finance, has agreed to lead the commission of investigation into the banking sector, for which the terms of reference have been agreed by the Dáil. In addition, there will be a review of macro-economic policy lessons as set out in the Regling-Watson report which will be carried out by the Joint Committee on Finance and the Public Service following the passing of motions in both Houses of the Oireachtas.

In addition, the Minister for Finance has announced a review of the Department of Finance to be carried out by an independent review group of experts to evaluate the systems, structures and processes used by the Department regarding the elements of economic management relevant to its role and operation. The review will examine what has happened and the consequences of actions taken or not taken in the Department. The review will help to ensure the Department can be redesigned to give the best achievable policy advice, assess risks and opportunities in the fiscal, economic and financial systems and the overall management of the public service. It will be redesigned to be the Department of Finance the public deserves.

Other more focused inquiries are ongoing, including, for example, a review of auditors and reviews by the ODCE, Office of the Director of Corporate Enforcement, and the Garda Síochána. The Department will assist all these inquiries as best it can, as well as the committee in its discussions today.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The focus of our inquiry is on ensuring the taxpayer achieved value for money. It deals with the issue of advice given by the Department and not taken by it in the days preceding the bank guarantee scheme. I do not think our role clashes in any way with the examinations or investigations referred to by the Secretary General.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  I thank Mr. Cardiff for his presentation. We have had an opportunity to read the various documents the Department has furnished to the committee. We have also had the benefit of reading the reports of Professor Honohan and Messrs Regling and Watson. We also have received more information from the ESRI, in particular, on the cost of keeping both Anglo Irish bank and the Irish Nationwide Building Society on life support. I think everybody looking on must be frightened by the level of the current Government deficit which was to be 11.5% but is now nearly 20%. A figure of €25 billion is going down the drain. We are, therefore, talking about serious money in discussing how our affairs were conducted.

I am not focusing on the responsibility of bankers, the Central Bank, the Financial Regulator or any of the others who had a role. The committee is trying to tease out what the mindset of the Department of Finance was and what information was available to it, whether this was sufficient and whether the Department was adequately used in the run-up to the giving of the guarantee. On that issue, it is clear from the papers supplied that many individual officials in the Department made strenuous efforts. We are not, therefore, casting any aspersions on the integrity of individuals or the efforts made by them. We are looking at the broader picture of whether the Department was fully and correctly informed and whether it used the information available to it to join the dots, so to speak.

I refer to the timeline shown in the documents — 2007 to 2008. In early 2007 share prices had gone through the roof, while property prices were at their highest. From then on there was a gradual decline. It is a question of the preparedness of the Department to deal with this situation. Was there a focus within the Department that was totally related to the problems of liquidity in the banking sector, as opposed to the solvency of the banking sector?

Mr. Kevin Cardiff:  I will answer the Deputy’s question by going back through the sequence. First and foremost, the issues that arose in the earliest part of the crisis — in mid-2007 — related mostly to the US, with an immediate and relatively quick knock-on effect on Northern Rock in the UK. The Northern Rock position was regarded as somewhat one of a kind, but I am not sure that turned out to be the case with the passage of time.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  What was it regarded as?

Mr. Kevin Cardiff:  At the time, it was regarded as somewhat one of a kind. In other words, it was felt that the bank’s particular balance sheet shape was different from most other institutions.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  It was the biggest run on a UK bank in a century.

Mr. Kevin Cardiff:  Absolutely.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  It was a year before our banking collapse.

Mr. Kevin Cardiff:  It was the year before.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was it accepted as being a huge warning signal——

Mr. Kevin Cardiff:  It was.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  ——in relation to our own situation?

Mr. Kevin Cardiff:  It certainly was. The Deputy asked if there was a focus on liquidity. It was very much a big liquidity warning signal. The issues that were coming through most vehemently from that incident related to the impact of liquidity shortages and the ability of such shortages to undermine an institution quickly. At the time, the UK authorities were saying that the institution in this case was — in the round — not too unsound, at least, as long as its liquidity situation was dealt with. We were also watching closely what was happening in the US, which was related to the sub-prime crisis, etc. During the first months of our planning, which was based on those events, we were watching very closely whether there was any interaction between the US issues and Irish financial institutions. The signals in those cases were reasonably good. We were also looking at the example of the Northern Rock issue and how that had been dealt with. It certainly would have been a large part of our thinking. One of the questions we asked ourselves was whether we would have been ready for a case like Northern Rock.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  We accept that. We accept that a lot of the Department’s strategic planning was in relation to the liquidity problem. While it was correct to prepare a contingency plan for a liquidity crisis, my concern from reading the newspapers was that the focus was too narrow. May it have been the case that the Department was comforted by advice from others, or that a lack of intelligence was presented to it? Was it unaware of, and flying blind on, the issue of the solvency of our financial institutions?

Mr. Kevin Cardiff:  I would not say we were flying blind. Certainly we were taking the advice we were given as regards the solvency issues. This situation changed quite a lot in the course of a year. The solvency issues that were becoming much clearer at the end of 2008 were not nearly so clear at the beginning of 2008.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The Department was preparing documentation and drafts in relation to the possible nationalisation of a financial institution.

Mr. Kevin Cardiff:  Yes.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  It is not named in the documentation. One of the words that was not redacted was a reference to a “society”, so I assume it was the Irish Nationwide. The Department must have been thinking of the possibility. Obviously, it was thinking about nationalisation. Would that not imply a solvency issue rather than a liquidity issue?

Mr. Kevin Cardiff:  It would certainly imply that an institution had a very fundamental problem if it was necessary to reassure the financial markets and the public about the stability of the Irish financial system by isolating the institution that was in trouble — by taking control of it, nationalising it and making it clear to the public that this issue had been dealt with. That could have been a solvency issue or a deep liquidity problem. Indeed, we were preparing and had prepared documentation and legislation in relation to a building society. We had also prepared documentation, or at least we had prepared a piece of legislation that would equally deal in similar terms with a bank. We had both of them ready as part of our contingency planning. I am not trying to avoid the Deputy’s basic question, which relates to whether we were sufficiently aware of the solvency issue. The answer is that the information and advice we had in early and mid-2008 was such that it was not the principal focus.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Yes.

Mr. Kevin Cardiff:  We were not ignoring it. The solvency issues were driven in large part by the failure of the business models of the borrowers and the underlying collateral of the institutions. That process had not started to happen in the first part of 2008. That process happened later in 2008. We were acting on the advice we had. I am not sure whether those who were advising us were in a position to do much better than they did.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Would it be correct to say the Department depended hugely on intelligence from outside, for example from the Central Bank, the Financial Regulator or some of the paid advisers?

Mr. Kevin Cardiff:  The Department of Finance’s principal sources of information on regulatory matters are the Central Bank and the Financial Regulator. That has always been the case.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was there also a tendency to rely very heavily on the reports of the institutions themselves?

Mr. Kevin Cardiff:  Indirectly, yes. Obviously we were relying on the reports of the Financial Regulator. The usual way for one to get information about an institution is to ask it the right probing questions to get the answers one needs. Of course there was a reliance on information from the institutions.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Is it not a fact that the accounting data of a bank is traditionally slow to recognise a deterioration in the true recoverable value of the bank’s loan book? In this instance, whether it was by accident or design——

Mr. Kevin Cardiff:  It is actually by design.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  ——information on the deterioration of the loan book was not forthcoming to the Department——

Mr. Kevin Cardiff:  Yes, but——

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  ——and the Department was not aware of it.

Mr. Kevin Cardiff:  The standard accounting practices are certainly not such as would provide forward-looking views. Stockbrokers and investment firms employ banks of banking analysts to do that kind of forward-looking work for them. I will provide an example. The committee will forgive me if I do not use the correct technical terms. A bank makes provision for a bad loan at the point when it becomes evident that the loan is bad. Bank provisioning is not forward-looking. Banks do not make provision this year for loans that are expected to go bad next year.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  What if there is a dramatic change in the marketplace affecting property values?

Mr. Kevin Cardiff:  In the past, banks that have tried to make provision in advance have been regarded as trying to manage their profits to smooth them out over time. This was an issue on the Continent.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Everyone saw the huge deterioration in bank share prices.

Mr. Kevin Cardiff:  Yes.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The market was casting its verdict from early 2007, down right through the next 18 months. There was a fall of approximately 70%. Similarly, anybody who took any interest in property could see something similar was happening in the property market. It had nothing to do with the sub-prime problems in the US. I refer to our own property market. Was any considered opinion or expertise in the Department looking at those trends and considering the impact they would have, not just on liquidity but on the solvency of the financial institutions who were shovelling out money for property?

Mr. Kevin Cardiff:  In 2008 there was an understanding that the property market was falling. It had peaked probably around the third quarter of the indices which do not always capture things very well. I suggest that commercial property peaked around the third quarter of 2007, eased downwards in the first half of 2008 and then started to nosedive thereafter so that it was really only in the third quarter of 2008 that there would have been a strong signal in actual pricing in the market about the scale of likely movements. Obviously, there was an assumption that a falling market would continue to fall for some period but there is no information available to us that suggested that this was likely to be of a scale that would be as catastrophic as it turned out to be.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Let us consider the three areas of information that go to the Department. First, that which comes from the institutions themselves. It is clear that they were not terribly upfront about the true situation. One issue intrigued me in the documents, in document No. 15, there is a reference to Anglo Irish Bank going to the Department on 18 September, 11 days before the guarantee, to give a formal presentation. What was it up to? Who instigated the presentation? Who attended the meeting and what was the subject of it?

Mr. Kevin Cardiff:  The meeting would have involved very senior Anglo Irish Bank management. From what I recollect it probably included Mr. Drumm at least. They had some thoughts. They knew they were in trouble and they felt that the two large Irish banks would be able to trade in the market on their too-big-to-fail status, that they would be able to raise funds on the basis that they would be able to declare the Government to be behind them or at least implicitly so. That is the case with big banks all over the world. There is always an assumption in the market that governments would support them. Even credit rating agencies build in a certain amount of allowance for potential government support.

I suspect that what was happening with Anglo Irish Bank at the time was that it was trying to manoeuvre itself into a somewhat similar situation. Part of its logic, for example, in suggesting around that time that it might be the purchaser of the Irish Nationwide was that it would then be able to present itself to the market as the preferred solution of the Government for whatever problem came along and that therefore it was implicitly within the Government’s support umbrella. That was something of the same——

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  What did Anglo Irish Bank come away with from the meeting? I see from its presentation that it was talking about the compelling medium and long-term opportunities. That was a week before the balloon burst. The strength of the management team was an issue.

Mr. Kevin Cardiff:  They got a reasonably sceptical response from the Department.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  I would hope so.

Mr. Kevin Cardiff:  We did not believe they had the kind of prospects they were suggesting and, in particular, they seemed to be presenting a very optimistic position instead of dealing with a set of problems.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  To put it mildly, it is intriguing that they thought it was appropriate even at that late stage for an institution to go to the Department, make a glossy presentation and that they would get a ready hearing.

Mr. Kevin Cardiff:  It is the old joke about going to the bank manager for a big loan or a small loan. One will get a readier hearing if a big loan is in question.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Is Mr. Cardiff saying that they were in such a bad situation that they had to get a hearing?

Mr. Kevin Cardiff:  No, I am saying that it was a significant financial institution and if such a body rings up the Department of Finance and says the system is in trouble and they would like to talk then we would be negligent not to at least have a discussion.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  To come to the other advisers who were——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Did Mr. Cardiff tell us who was at the meeting?

Mr. Kevin Cardiff:  I believe it was Mr. Drumm from Anglo Irish Bank. I can double check after the meeting but I believe that was the case.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Who attended from the Department?

Mr. Kevin Cardiff:  It would have been at least me. I do not believe Mr. Doyle, the then secretary, was present.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The Department was obviously dependent on other State institutions, some would say perhaps over-dependent. Is Mr. Cardiff satisfied that the Department was getting the full picture on the gradually more desperate situation of the financial institutions from the Central Bank and the Financial Regulator?

Mr. Kevin Cardiff:  We were satisfied that we were getting a detailed and up-to-date picture of financial flows, namely, moneys in and moneys out.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  I am talking about the broad picture of financial strength.

Mr. Kevin Cardiff:  In terms of financial strength there was a lot of uncertainty around at that point.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was that being highlighted by the advisers? There is a reference in document No. 6 to the Financial Regulator saying there was no evidence to suggest that Anglo Irish Bank was insolvent on a going concern basis. That statement dates to 25 September. It was within a week——

Mr. Kevin Cardiff:  Of the guarantee.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was the Department taken in by that? Did it rely on that information or was there anyone within the Department to question the competency of that advice?

Mr. Kevin Cardiff:  To take what that advice said and parse it; it said that there was no evidence that the bank was insolvent on a going concern basis. That was not to suggest, for example, that there were not significant problems with Anglo Irish Bank, nor was it to suggest that it did not have losses to take. What that statement means is that, liquidity apart, Anglo Irish Bank was regarded as it stood at that point as being able to meet its obligations from its existing assets and capital base. That is what I would regard that as meaning rather than any suggestion that there was no difficulty with Anglo Irish Bank. At that point, we, the Central Bank and Financial Regulator were working 18 hour days sometimes and seven day weeks so we knew that there was potential difficulty. There was no doubt that there was a significant problem. No one was taken in by any single statement.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  I suppose hindsight is easy but in retrospect does the Secretary General now accept the advices he was getting, on which he may have been relying, were not dependable? It is clear that the picture painted by Anglo Irish Bank in the previous week when it came in to make a presentation and based on the information coming from the Central Bank and the Financial Regulator did not fully focus on the deteriorating and rather desperate state of the financial institutions——

Mr. Kevin Cardiff:  Yes.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  ——from the point of view of solvency as opposed to liquidity.

Mr. Kevin Cardiff:  The Deputy should look at the top of document No. 6, which said that PwC reported on the Anglo Irish Bank loan book. PwC had been called in around about that time to start a detailed investigation of Anglo Irish Bank and this was a preliminary report on the basics of the loan book. That work went on for several months and has since been published. In retrospect, it would have been better to have the information that was available in late October and early November in August and September.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The last area on which I want to focus before handing over to my colleagues concerns the advice that was coming directly, or via the other institutions, to the Department from the major outside firms. As I understand from the papers, PricewaterhouseCoopers was initially hired by the Financial Regulator.

Mr. Kevin Cardiff:  Yes.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  When was that?

Mr. Kevin Cardiff:  In the middle of September 2008.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Is it correct that PricewaterhouseCoopers’s view was that only 3% of the loans of Anglo Irish Bank were impaired?

Mr. Kevin Cardiff:  No, to be fair to PricewaterhouseCoopers, it gave information that, on an accounting basis, and as reported by Anglo Irish Bank’s accountants as of that point, 3% of the loan book was regarded as impaired.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Did it take the information given to it by Anglo Irish Bank?

Mr. Kevin Cardiff:  No, it did a job for a couple of months. Obviously this was the start of that job. It was information that it took from Anglo Irish Bank that presented a picture of the accounts at that point in time.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Did this not all add up to what was regarded as the received wisdom right up to the end? I refer to the view that the fundamentals were sound, that the banking institutions were adequately capitalised, that their solvency was not the real issue and that liquidity in the interbank market was causing the problem. Did this not reinforce the false picture?

Mr. Kevin Cardiff:  No. At that stage in the process there was a clear sense that there were very real difficulties. I do not believe there was anybody doubting that.

I am trying to answer but am not doing so very clearly. To be very clear, there was not a picture available to us at that moment from either PricewaterhouseCoopers, based on its first few days’ work, or the Financial Regulator, Central Bank or the market showing that any of the institutions was likely to have such difficulty as to burn through its capital, or that Anglo Irish Bank’s €7 billion, €8 billion or €9 billion of ordinary capital would be burnt through by the losses it had to take.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Goldman Sachs had a role in respect of Irish Nationwide. When did it come in? What sort of advice was provided?

Mr. Kevin Cardiff:  Goldman Sachs was already doing some work for Irish Nationwide.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was it paid for at the behest of Irish Nationwide?

Mr. Kevin Cardiff:  It was at the behest of Irish Nationwide. At the end of the first week of September, on a Friday, we had a phone call to say Reuters was running an incorrect story about Irish Nationwide. There was concern that it could trigger a run on Irish Nationwide. We did what we had always anticipated we would do in that situation, namely, we called a meeting of the various agencies concerned and asked what we should do if Irish Nationwide was in trouble. We had already been working on various Bills. The reason one sees Xfi mentioned as the relevant society in the papers is that Irish Nationwide was the first institution to trigger this set of meetings on this issue.

Basically, things ran more or less according to plan for the first weekend or two. We recalibrated the thinking and work already done to deal with a building society in trouble. We considered how one would nationalise it, what one would do and what one would take over or not take over. It was decided over those weekends that there needed to be more information about Irish Nationwide and its loan book, having regard to the issues the Deputy raised.

The regulator was aware that Goldman Sachs was already doing some work in Irish Nationwide and it arranged that Irish Nationwide and Goldman Sachs would produce material needed by it. It hoped Goldman Sachs would produce it very quickly because it was already familiar with the institution. The regulator arranged that this would be done on a proper basis, in other words, that the reporting would be to the regulator although Irish Nationwide was paying for the work. It was agreed with Goldman Sachs, which was being paid by Irish Nationwide but reporting to the Financial Regulator.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  What was the assessment of the work done by Goldman Sachs?

Mr. Kevin Cardiff:  The assessment was that the Irish Nationwide loan book had some challenges and some up-sides, that it was probably no worse than any other property loan book in the country and that there were probably some positive aspects if things worked out well on certain loans. It was concluded that the bank had profit-sharing possibilities and so forth and that, as a consequence, it could be expected to take some losses, but not such as to challenge its basic capital.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  That is an understatement of the horrors that ultimately emerged in the institution.

Mr. Kevin Cardiff:  In fairness to it, it also made clear the data were based on discussions, albeit very detailed, on a loan-by-loan basis with management. It also intimated that the management in Irish Nationwide was very concentrated around just a couple of people. It was not an issue in terms of obtaining information but it meant the information was coming from a limited number of sources.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  From the chief executive?

Mr. Kevin Cardiff:  Yes, and one or two others.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I am losing Mr. Cardiff slightly. On what date was the Friday meeting to which Mr. Cardiff referred?

Mr. Kevin Cardiff:  That would have been the first Friday in September, around 7 September.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  On 7 September.

Mr. Kevin Cardiff:  Yes. The phone call was on the Friday and the meeting was at 10 a.m. on the Saturday morning. Talks continued more or less indefinitely until November.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  On 7 September.

Mr. Kevin Cardiff:  The series of meetings continued pretty much unabated until November or thereabouts.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The mindset and thinking at that time would have led to the crisis discussions before the bank guarantee. It seems clear to me that the Department does not appear to have been fully briefed by anybody on the real difficulties that existed in relation to insolvency or a lack of liquidity in the financial institutions. I am sure this will emerge in further investigations. It is a matter for another day.

Mr. Kevin Cardiff:  It is clear enough from Professor Honohan’s report that there was not among the people advising us a clear and detailed understanding of the depth of the likely damage to the institutions’ loan books. It would be reasonable to inquire as to the information the people who were advising us could have had but did not have. Professor Honohan does so, but not explicitly. The answer is that the information to which the Deputy refers that would have been able to predict the future for two years was probably not readily available. The reason, in part, is that after the Financial Regulator commissioned PricewaterhouseCoopers to carry out a very detailed and very professional four-week or six-week invasive investigation, albeit very quickly, into Anglo Irish Bank, it was not in a position, even by November 2008, to say Anglo Irish Bank would cost the State anything like what it did cost it subsequently. I accept the point that it would have been better to have had the detailed, invasive investigation or inspection of Anglo Irish Bank and other institutions earlier but some of the information it would have been nice to have simply did not exist as it needed to be prospected for.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  There was obviously a huge emphasis on the freezing of the interbank market and not enough focus on the banks’ huge exposure to property related assets, which clearly had been nosediving for quite some time. Nobody was drawing conclusions on the potential impact of that exposure.

Mr Kevin Cardiff:  The nosedive was more recent at that point than the Deputy suggests. The nosedive in the property market occurred around mid-2008.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The decline was quite obvious from early to mid-2008.

Mr. Kevin Cardiff:  The change in sentiment was clearer earlier, but the valuations people were getting for their properties were not changing at that kind of rate, so there was still a sense of——

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  The money was not being paid down on the marketplace.

Mr. Kevin Cardiff:  A professor in UCD who does work on valuations using the American market——

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  In conclusion, I want to touch briefly on the Merrill Lynch issue. That company ended up as chief adviser on the main decision that was made. It was very late in the day before it was engaged, which I believe was 24 September. I find it extraordinary that people who acted as the principal advisers had such a short time to do the work that they did.

Mr. Kevin Cardiff:  The principal advisers to the Department and the Government were the official agencies. Merrill Lynch came in late in the day and did a very comprehensive job very quickly. The paper came from that company, but it was a construct of four or five days of constant work by a much broader group. Merrill Lynch was given the task by the Minister of collating that set of thoughts into a set of options that he could work from.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Yes, but the company had to take much of the advice from the information that was made available rather than doing any investigation. Merrill Lynch made statements about the impairments of the banks, and stated that 3% of the Anglo Irish Bank loan book was currently regarded as impaired. The company had to take this at face value, because its staff had no time to do any further investigation.

Mr. Kevin Cardiff:  In fairness to them, they did not take that at face value. They would not have been naive.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  They would not have had the opportunity to do any detailed investigation.

Mr. Kevin Cardiff:  Yes, but had they been asked to do that, they would have said it was better done by an accountancy firm such as PricewaterhouseCoopers.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  It is fairly clear from its comprehensive paper that the chief advisers did not give a simple proposal to have a blanket guarantee. In fact, they highlighted the negative impact that such a guarantee would have on the State’s sovereign credit rating and they also raised issues about credibility. It was not in any way a single recommendation from them on the decision to be taken. They certainly did not recommend the guarantee being extended to the subordinated bonds. Why was that option ultimately taken?

Mr. Kevin Cardiff:  Would the Deputy like me to read what the Minister said? Maybe not.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  No. We know what that Minister said. I am interested in the Department’s thinking and the Department’s advice.

Mr. Kevin Cardiff:  I will talk the Deputy through the Merrill Lynch paper, because it is more subtle than it appears. There is a sequence in the way that paper operates. The first substantive piece of the document refers to the potential nationalisation, or protected custody, of a financial institution such as Anglo Irish Bank, as being something that might be useful to do in the very complicated circumstances that existed. The paper stated that in doing so, the guarantee would be provided to Anglo Irish Bank in similar terms to what was provided more generally. In other words, it would apply broadly and to all deposits and bonds, including dated subordinated debt. In doing so, the paper stated that we would provide to the market an implicit guarantee that if another institution was in the same kind of difficulty, that is the way the Irish Government would react. The Government would not let a large financial institution fail and it would act to guarantee all of the bondholders, including dated subordinated bondholders and the depositors. The paper stated this was implicit rather than explicit, so it did not suggest that this be done in a legal way. The bond guarantee would provide implicit comfort to the rest of the market and that should take care of the liquidity issues of the institutions in most difficulty at that stage.

The paper went on to state that we would then have to find a mechanism for ensuring the liquidity of the rest of the banking system. There were two suggestions for that in the Merrill Lynch documentation. The first suggestion was what was known as a special liquidity swap arrangement, which would effectively swap the Government’s credit for bank credit in the market, so that banks would be able to go to the market, raise very significant amounts of money — tens of billions of euro — using Government debt or money from the ECB. This system would give them the money potentially needed to replace deposits that would be flowing out, or other debt that would not be achievable.

The paper stated that an alternative to this SLS approach was a broad guarantee for the whole system. On the broad guarantee for the whole system, Merrill Lynch favoured a narrower approach——

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Was there not a conclusion reached on the extension of a discreet liquidity advance to Anglo Irish Bank and possibly Irish Nationwide Building Society?

Mr. Kevin Cardiff:  A conclusion was reached that that would have to be done anyway. As I read the paper, the advice was for an SLS in the broader system, and an alternative for a broad guarantee, although not as broad as the guarantee that was put in place.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  Why go the whole hog for the guarantee?

Mr. Kevin Cardiff:  I am not the Minister and I am not in the Government.

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  That was a policy decision.

Mr. Kevin Cardiff:  Yes. I can try to help the committee with the background on that. Merrill Lynch acknowledged this. I am not saying that the company was advocating a broad guarantee to the same extent as the eventual guarantee, but it certainly advocated it for Anglo Irish Bank. Anglo Irish Bank was sufficiently in trouble that it would need such a guarantee, within the context of a nationalisation. Let us look at the countervailing issues. First, the pace of liquidity difficulties in the market was accelerating so the extent to which a liquidity swap would have had to be used was also growing. This was not something that had been done in the euro area before so it would have been a little innovative. It had been done in the UK but with a joint Government-Bank of England approach where the UK Government in effect arranged with the Bank of England for that liquidity to be provided through that swap arrangement.

The basic situation was changing quickly. On the day of those discussions, first, stock markets, having been falling through the year, had a fairly calamitous day, especially for Anglo Irish Bank but for all the Irish banks, and, second, some of the institutions were reporting that they were unable to get quotes for money — not just that they could not get money as institutions, but they were being told no money would be available to any Irish institution from particular sources. In addition, the broader context was getting much worse. As was publicly known on the day, Fortis ran into trouble. I met a Belgian colleague recently who talked about “Fortis day” and when I asked what day that was, she said it was the same day. Obviously, we each have our own scars — ours, I am afraid, are somewhat deeper. Fortis was in trouble. The Lehman’s impact was spreading. The US TARP, which was intended not just to stabilise the US system but also to have a global impact, ran into difficulty in the US Senate and Congress — it had been expected to get approval that day but did not. We did not have full details at the time but UK financial institutions — RBS and others — were themselves having very significant liquidity difficulties.

All of this was adding up to a picture that had changed. As bad and all as it had been at the weekend, it was changing even further. It would have been reasonable to think that if one’s preferred option for a single institution in trouble was a nationalisation option, by the end of that day one really had to consider whether that would be the preferred option if there were multiple institutions in liquidity difficulties, and one would have had to consider whether a swifter and more all-encompassing approach would be likely to get one through the next week better than a subtler “nationalise one, guarantee one and have liquidity swaps for others” approach. We could have done these things. Technically, we were pretty much ready to be able to put any one of these kinds of approaches into legislation within a matter of days.

To be honest, that evening I was delighted I was not the decision maker because it was an horrendous decision for anyone to have to make and it was an horrendous decision for the Dáil to have to make in legal terms two days later. The decision that had to be taken had to encompass all of those different options, none of them easy, none of them right, to be fair to all the people concerned, and one had to judge which would be the most impactful. In the Merrill Lynch document of 26 September, the column that deals with the various pro and con options states that the broad bank guarantee option is the most impactful, most aggressive and most assertive approach. Those were the kinds of considerations that were in people’s minds, namely, what would likely be the most effective intervention?

Deputy Jim O’Keeffe: Information on Jim O'Keeffe  Zoom on Jim O'Keeffe  I am sure colleagues will want to tease that out further with Mr. Cardiff.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Before moving on to other members, I wish to deal with issues arising from questions put earlier by Deputy O’Keeffe regarding the thinking of the Department leading up to September 2008. In notes Mr. Cardiff had for the last meeting we had in May — notes of questions which he might be asked but, in the event, was not asked — it is stated: “The Department of Finance warned from 2005 onwards that the historically high share of construction as a share of activity left the economy vulnerable to macroeconomic shocks”. The word “shocks” is used, not “downturn”, “adjustment” or “slowdown”. How then could the Department in ways be so passive with regard to the evolving crisis?

With regard to the period between March and September 2008, March was almost a dry run for the crisis in September. From the evidence that has been made available to us and the impression I am gaining from the evidence I have read, the Department seemed to go along with the more carefree attitude of the Department of the Taoiseach. In fact, it almost sat on external critics or external economic commentators who were warning about the possible economic collapse.

Mr. Kevin Cardiff:  I am not sure to what the Chairman is referring in his last point.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I am referring to Mr. Jim Power, who warned about possible economic collapse. Department officials contacted his bosses about possible damage being done to the economy. How often did that type of activity happen, namely, that Department officials sat on independent economic commentators?

Mr. Kevin Cardiff:  That does not happen. The particular event to which the Chairman refers did not unwind in the way he suggests it did. I have a difficulty with the Chairman’s suggestion at the beginning in talking about individuals but, to be clear, as far as I am concerned——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The question I am putting to Mr. Cardiff is as follows. Until now, Mr. Neary seems to be the fall guy for everybody. I am suggesting that if Mr. Neary had said the whole economy was built on sand and that the property situation would cause major problems for the economy, could he have been sat on like a tonne of bricks? In other words, was the thinking within the Department muted?

Mr. Kevin Cardiff:  The question is whether the Department of Finance would have listened to a regulator who was more assertive in regard to the advice he was given about the stability of the system in a particular set of economic circumstances. The answer is that it is very hard to know how we would have reacted to that. I would hope not. Looking back, one would hope that if Mr. Neary had said “Here is a major property crisis that will create a major banking crisis”, we would have reacted to that fully and appropriately.

The Chairman will see from the kind of documentation that is now available to him that there was anything but an impassive approach to the possibility of a financial crisis. Could it have happened that Department of Finance officials in 2007, when the property market was still increasing in value——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  But built on sand because the Department’s own briefings in 2005 stated there was a possibility of a major “shock”.

Mr. Kevin Cardiff:  Yes, and even budget speeches and so forth in the subsequent two years set out that there were risks in those areas. As to whether we would have slapped down a regulator that made such thoughts known, I do not believe so but it is easy to say that in retrospect.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Was there a slapping down of independent commentators who suggested that major risks and the possibility of shocks existed?

Mr. Kevin Cardiff:  No, not by the Department that I am aware of. As for the particular case to which the Chairman referred, while I happily will discuss it with either the Chairman or Mr. Power in private, I will not do so in public. To be clear, as far as I am aware, the Department which I am representing is happy to say to anyone that Mr. Power is an honourable gentleman and has never suggested otherwise to anyone else.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  When did the Department finally have doubts about Mr. Neary’s competence?

Mr. Kevin Cardiff:  The Chairman stated at the outset of the meeting that we should not talk about individuals. However, if he wants me to discuss——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Mr. Cardiff should talk about the Financial Regulator instead.

Mr. Kevin Cardiff:  ——the regulatory system, we certainly were concerned in the midst of this crisis that we did not have a sufficient understanding of the details of the workings of each bank. We certainly were reliant on the work, efforts and advice of the Financial Regulator throughout. I suppose the fact that in September 2008, it was found necessary to employ PricewaterhouseCoopers and others to perform deeper analysis would suggest there certainly was a general concern, including in the Financial Regulator, that there was insufficient information.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I thank Mr. Cardiff and his officials for their attendance. Before discussing the detailed contents of some of the documentation or, more pertinently, some of the documentation members have not received, I first wish to put together the broader picture because members are operating in something of a vacuum. Mr. Cardiff should outline briefly what was the total value of the guarantee when it was first given and what it is at present.

Mr. Kevin Cardiff:  I am sure one of my colleagues will dig up some figures. The original value of the guarantee was approximately €440 billion but that included the value of the deposits that already were guaranteed under the ordinary deposit guarantee scheme.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  How much was additionally guaranteed under this scheme?

Mr. Kevin Cardiff:  At a guess, it was approximately €380 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  What is the value of what is guaranteed under both schemes today or by the end of the six months to June?

Mr. Kevin Cardiff:  It is somewhat less but someone will provide the figures to me shortly.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Of course it is less as some of it has gone to NAMA. However, I seek the figure.

Mr. Kevin Cardiff:  While some of it has gone to NAMA, much of the funding of Irish banks now comes from the ECB. When taken together, those two things have resulted in a fair shift.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I am trying to get a feel for what is the current position. As this meeting is about the guarantee, these are the key figures. While one can talk about documentation, I seek to set out the parameters of the present position.

Mr. Kevin Cardiff:  We will get that figure for the Deputy.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I will wait for it. I will sit here for a minute or two because I genuinely thought this figure should be at the top of everyone’s head. What was the amount of the guarantee then and how much is it today? The purpose of this meeting is to discuss the guarantee and while one can talk about the differing views of economists or individuals, which is highly interesting, the focus of this meeting is the bank guarantee. I am trying to ascertain what is the present value of the bank guarantee. This is my first question and I want to know the answer before going further.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  We will try to get an answer.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I believe the committee should wait until this answer is forthcoming. Moreover, there is nothing unusual about this question.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Well——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  With no disrespect, while I can move on, the purpose of this question was to set the scene. The purpose of this meeting is to discuss the bank guarantee and I have asked a basic question, namely, what is the present value of the bank guarantee?

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  This is the reason I have allowed a pause in proceedings because I am surprised that this figure cannot be retrieved quickly.

Mr. Kevin Cardiff:  I now have it to hand.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I thank Mr. Cardiff.

Mr. Kevin Cardiff:  Returns for April that were submitted to the Financial Regulator at the end of May——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Sorry, the end of what month?

Mr. Kevin Cardiff:  The end of May. They show that at the end of March, liabilities covered under the credit institutions (financial support) scheme, CIFS, that is, the first guarantee scheme, were €130 billion. Liabilities covered under the eligible liabilities guarantee scheme, that is, the successor scheme that more or less has taken over that arrangement, were €139 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Does the figure of €139 billion compare with the previous figure of €380 billion? The original guarantee was for €380 billion, to which can be added the amount already covered by the existing guarantee for deposits of below €100,000. Mr. Cardiff stated that when the guarantee was put in place at the end of September 2008, its total value was €442 billion, €380 billion of which consisted of the bank guarantee scheme that was then introduced. In addition, existing guarantees within the system for smaller deposits had a value of €62 billion. Am I correct?

Mr. Kevin Cardiff:  Yes.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Mr. Cardiff should now provide the comparable figures for the end of May. What is the comparable most recent figure for the €62 billion covering the smaller deposits and what is the comparable figure for the €380 billion?

Mr. Kevin Cardiff:  The basic deposit figure has not shifted much and the other is €270 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Does Mr. Cardiff suggest that the figure of €380 billion has not shifted?

Mr. Kevin Cardiff:  No. I meant the figure of approximately €60 billion has not shifted.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Yes, the figure of €62 billion is approximately the same as it was. Is Mr. Cardiff suggesting that the figure of €380 billion has now fallen to approximately €139 billion?

Mr. Kevin Cardiff:  Yes. It probably has reduced even further by now because the ECB numbers have risen.

Deputy Brendan Kenneally: Information on Brendan Kenneally  Zoom on Brendan Kenneally  What?

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Mr. Cardiff gave the figure of €139 billion a minute ago.

Deputy Brendan Kenneally: Information on Brendan Kenneally  Zoom on Brendan Kenneally  Those figures should be clarified again.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Can Mr. Cardiff again clarify these figures?

Mr. Kevin Cardiff:  It is €270 billion between the two schemes.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  So the figure of €139 billion compares with the figure of €380 billion.

Mr. Kevin Cardiff:  I do not think the Deputy can break it down that way. The two schemes must be taken together.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I refer to the smaller guarantee scheme that already existed within the system. Is it valued at approximately €60 billion?

Mr. Kevin Cardiff:  Approximately €60 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  It cannot have changed very much.

Mr. Kevin Cardiff:  No, it did not change.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Savings have increased——

Mr. Kevin Cardiff:  That is right.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  ——but I will not argue the toss with Mr. Cardiff in that regard. Mr. Cardiff is saying that the figure is approximately €200 billion in respect of the major bank guarantee scheme and that the total figure is approximately €270 billion, of which approximately €60 billion-plus consists of the small guarantee scheme.

Mr. Kevin Cardiff:  No, the total is made up of the figure of €270 billion in addition to the figure of €60 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  So the total figure is approximately €330 billion. In other words, the figure of €270 billion approximately relates to the original figure of €380 billion. Consequently, there has been a substantial reduction in the amount being guaranteed.

Mr. Kevin Cardiff:  Yes.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  While I do not intend to be offensive, I am having difficulty in hearing what Mr. Cardiff is saying.

Mr. Kevin Cardiff:  I am sorry.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  It is the microphone.

Mr. Kevin Cardiff:  No, I tend to mutter. It works in smaller meetings because people lean forward and pretend they are listening but in this meeting, it does not.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Right. I would fall out of the desk were I to lean forward any further.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  That is a useful quality.

Mr. Kevin Cardiff:  To be clear, I have to hand a better note that provides the details. While these figures extend as far as the end of December 2009, the direction is clear. At the end of September 2008, the deposit guarantee scheme covered €83 billion and the bank guarantee scheme covered €345 billion, which taken together come to——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Approximately €425 billion.

Mr. Kevin Cardiff:  —— approximately €430 billion. The exact sum is €428 billion. The deposit guarantee scheme covered actually had fallen slightly by the end of December 2009 to approximately €77 billion and the total value of guaranteed liabilities had fallen to approximately €360 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Had the figure of €345 billion fallen to something like €280 billion?

Mr. Kevin Cardiff:  Yes. Exactly that.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Does the Department now believe the figure is approximately €270 billion?

Mr. Kevin Cardiff:  Yes, by the end of March it was approximately €270 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  It decreased from €380 billion at the time of the major bank guarantee scheme, in layman’s English, to approximately €270 billion today.

Mr. Kevin Cardiff:  In total it has fallen by quite a lot. Some of that is technical in that where the ECB provides funds, it is not subject to the guarantee. We must still pay the ECB but it is not subject to the guarantee.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Not under this scheme.

Mr. Kevin Cardiff:  Yes, not under the scheme.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Of that €270 billion, how much is subordinated debt on which everyone is fixated? Has that washed out of the system?

Mr. Kevin Cardiff:  Approximately €5 billion of the subordinated debt in the system has been washed out. I do not know the total number but the number for dated subordinated debt for Anglo Irish Bank, which most people are interested in, is something under €3 billion. I think it is €2.5 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Subordinated debt on day one was approximately 5% of the €400 billion, which amounts to €20 billion.

Mr. Kevin Cardiff:  It was 3% of the total.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  It was 3%, which is approximately €12 billion. Mr. Cardiff is telling us some €5 billion has washed out of the system. Is the figure €5 billion or €7 billion?

Mr. Kevin Cardiff:  Some €5 billion has gone because banks have negotiated with the bondholders to take a lower return.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Has there been a 40% reduction in that issue? The proportion of subordinated debt amounts to 1% or 2%. In 2008, 2009 and 2010, what income have we received? Is some of it by way of additional shares?

Mr. Kevin Cardiff:  The figure is €700 million in respect of the credit institutions financial support scheme, CIFS, and another €90 million, amounting to €800 million in total. More money has yet to come in. The expected income for the two years from September 2008 to September 2010 is just over €1 billion.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Is some of that through shares?

Mr. Kevin Cardiff:  No, that is cash income.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Mr. Cardiff referred to subordinated debt being reduced substantially. Has some of that been reclassified as senior debt?

Mr. Kevin Cardiff:  Not reclassified in that sense. Institutions have negotiated so that in some cases it was the equivalent of buying back subordinated debt at a much reduced price and, in some cases, issuing senior debt under the guarantee.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  If subordinated debt was put to one side, those who were reclassified would still be covered by the scheme.

Mr. Kevin Cardiff:  If they received senior debt in return for their subordinated debt, they would be covered under the guarantee as it affects senior debt.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  The income from the scheme for the past two years is approximately €1 billion. What payments out has the Government made under the scheme?

Mr. Kevin Cardiff:  There has not been a claim under the guarantee.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  To some extent, while there was a risk, as there is in issuing an insurance policy, there has been no claim on the policy and, as time goes on, the amount being covered by the scheme reduces and the potential for claims must be diminishing given the recapitalisation of the banks. Does Mr. Cardiff agree?

Mr. Kevin Cardiff:  Yes.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I wanted to get the global picture on this matter. I refer to the documentation supplied to us. Last week Mr. Cardiff supplied 37 documents to the committee, 12 of which were redacted or, in layman’s English, had parts blanked out. Some 25 documents were fully released, some of which were no more than public press statements. In the case of seven of them, the reason given was that they were not released because they contained information specific to institutions. On 19 July, Mr. Cardiff wrote to the committee again. We had asked for a list of the documents not supplied in the original 37 documents. Mr. Cardiff provided us with the names of the documents, which the committee released this morning, referred to enclosing a schedule of key documents concerning the bank guarantee that were not released to the committee and said the documents concerned the run-up to the decision to give the general Government guarantee and did not include any record of actual deliberations of Ministers in preparation for the Government decision or the subsequent process leading to the legislation a few days after.

A considerable amount has not been released. I have summarised the document received this morning. From 1 September to 10 September, four documents remain unreleased. From 11 September to 19 September, a further 13 documents remain unreleased. From 20 September to 28 September, 20 documents remain unreleased and from 29 September the Department decided not to release five further documents. This amounts to 47 documents that remain unreleased. Added to the total of 37 documents released, this amounts to 84 documents in total. Of the 84 relevant documents, only 25 documents have been fully released. Two thirds of the documents considered to be key documents, to use the words in Mr. Cardiff’s letter, have been withheld in full — 60% — or partially released — 15%, leaving one third fully released. This one third includes innocuous items such as press releases. Many conclusions are being drawn and I would hate our committee to carry out an investigation about the documents as presented to us in the full knowledge that only one third of the documents Mr. Cardiff refers to are fully before us. I would not like the committee to be in a cul-de-sac when it is not aware of the bigger picture, the documentation and the advice available to Government, which we are trying to establish. The overwhelming majority of advice to the Government has not been released to us. This is a factual situation and I am not necessarily criticising. Some documents from the Attorney General have legal privilege and cannot be released. Of the 47 documents not released us, five refer to matters specific to institutions. Some seven documents were not released at all or were partially given to us and the reason provided is that they are specific to institutions.

From the documents before us and the list of the documents we do not have before us, they generally relate to internally generated documents in the public service, such as from the Central Bank, the Department of Finance, the Financial Regulator and NAMA. I do not see documents from AIB or Bank of Ireland. Remembering what happened on the night of 28 September and 29 September, the critical point was that the chairmen and chief executives of Bank of Ireland and AIB landed in Government Buildings. We can talk about Anglo Irish Bank but the guarantee was introduced primarily to prevent knock-on problems for the two main banks, which have not been discussed. Did AIB or Bank of Ireland provide any document? There is no reference to them in the documents received. There is no reference to AIB documents in the documents withheld. The implication is that they did not produce a single sheet of paper. Does Mr. Cardiff have one file for internal documents and another file for documents from the main banks that is not to be mentioned, never mind withheld? Does Mr. Cardiff understand where I am coming from?

Mr. Kevin Cardiff:  I do.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I understand there is commercial sensitivity. Perhaps the release of these documents would never have been possible because of damage to the financial institution. I am not saying they should be released. I am just trying to get a picture of where we are and what we are looking at relative to the overall information in the system.

Mr. Kevin Cardiff:  The Deputy may take his figures if he likes. He could multiply them if he wanted to. The committee was kind enough in one sense and awkward enough in another to give me quite a difficult brief. I was asked to provide not just documents but the key documents, which meant there was an editorial decision of sorts to be made. I have tried to do this honestly. The committee may say some of these documents are of no interest at all while others are more important.

In so far as we were getting information from the main institutions during that period, it was coming through the regulator. The information specific to institutions that I have redacted is probably almost banal in retrospect, but I have been a little cautious about releasing it in most cases. The toing and froing with the Attorney General is a little frustrating because, to be honest, the information might even make us look a little better in the sense that it would show a large amount of technical preparation, but I do not think it would inform the committee very much. It might outline the development of the technical thinking, but that is not, I suspect, what the committee is interested in.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Deputy Fleming has asked valid questions. My concern is that we are working almost in a vacuum.

Mr. Kevin Cardiff:  Yes.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  For example, let us consider the table of key documents not released. Friday, 13 June——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Was any document produced by AIB or Bank of Ireland? I would like to hear the answer and then the Chairman may come in. Mr. Cardiff did not get to that.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I was coming to that.

Mr. Kevin Cardiff:  In all the time I have been dealing with these documents there was no — I should not say there is no document but I cannot recall one off the top of my head. Certainly the regulator had discussions with each of the institutions. There were discussions between the regulator and each of those institutions on that first weekend I spoke about when Irish Nationwide was in some difficulty. There was ongoing contact, obviously. In terms of whether there was a submission from AIB or Bank of Ireland that said how it saw things going, similar to the document from Anglo Irish Bank in which it set out its stall and the other one from Irish Nationwide, there was no such document.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I understand there was no large document. I am talking about what happened on the day.

Mr. Kevin Cardiff:  On the day?

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Everything we have dealt with has been one step short of the final furlong with regard to this issue. On that day, the key thing the public understood was that the chairmen and chief executives of the two main banks had arrived in Government Buildings. They were not presenting a major document, but they must have had key figures with regard to their commitments and the falls in their share prices. There must have been some documents. They must have spoken to senior officials who in turn spoke to officials from the Department and the Financial Regulator. The Department officials would have advised the Minister for Finance, who then had to advise the Taoiseach and his Cabinet colleagues. We all understand from knowledge in the public domain that there were phone calls to Ministers throughout the night.

I am trying to understand the process. That can hardly have happened without a sheet of paper. Several phone calls had to have been made and discussions had to have taken place from the time the bank representatives arrived and spoke to the staff of the Financial Regulator up to the time the Ministers and the Taoiseach were fully briefed. It cannot have all happened without a sheet of paper, or did it? If so, I would be concerned about people’s interpretation of each discussion and each further discussion. Some of the conversations would have been at fifth or sixth hand by the time Ministers were briefed. I am not disagreeing that the guarantee was needed. I am just trying to find out about the process that led to it and how the system worked.

Mr. Kevin Cardiff:  That process was between Ministers with officials on hand to provide their best estimates and advice.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Based on what?

Mr. Kevin Cardiff:  Based on the set of options, in effect——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  There is nothing in any of the files we have received, or even those we have not received, that mentions AIB or Bank of Ireland. Everyone knows Anglo Irish Bank and Irish Nationwide had difficulties, and their information is there, but we did this to protect the banking system, which in layman’s terms consists of the two main banks. They are the banks from which we get our cash when we go to an ATM. We did that to ensure there would still be a banking system the following weekend so that people could be paid. We did it to ensure there was no difficulty for our two main banks which constitute the majority of our banking system. I do not see any reference——

Mr. Kevin Cardiff:  There was——

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  ——to those two banks. Given that the four key people were in Government Buildings, something must have been said. Some document, briefing note or list of key points must have been prepared by someone along the line. I am assuming there were such documents and I am giving Mr. Cardiff credit for assuming there were. However, there is no reference to them anywhere. Mr. Cardiff might just explain what happened on that night.

Mr. Kevin Cardiff:  To be clear, there was no separate meeting of Department officials with AIB or Bank of Ireland that day. To the best of my recollection, the Department of Finance did not set up that meeting with the two financial institutions.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Did they request the meeting? Who requested the meeting?

Mr. Kevin Cardiff:  As I recall the sequence — I imagine there were, as the Deputy said, lots of people running around — it was they who requested an opportunity to brief the Taoiseach and the Minister.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Did they brief the Taoiseach and the Minister directly? I am not asking for the content of Government discussions.

Mr. Kevin Cardiff:  Yes, they did.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  Were officials present?

Mr. Kevin Cardiff:  Yes.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  From what organisations — the Financial Regulator, the Central Bank, the Department of Finance, other Departments?

Mr. Kevin Cardiff:  From all those. The Irish Times had it miraculously correct a week later, notwithstanding Cabinet confidentiality. There were officials from the Department of Finance, the Central Bank and the Financial Regulator. As members can imagine, the Attorney General and the Secretary General to the Government were there. I am not saying that is a comprehensive list. There were other officials in an outside room and I have no doubt those other officials would have had to hand the kind of documents the Deputy is talking about: balance sheets, figures, financial flows and similar documents — reference documents.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I can understand, for a meeting of that level, how decisions were made and perhaps the nature of the decisions that were made. All I am saying is that we could spend the rest of the year going through what is in front of us, but none of that is relevant to what happened on the night in question. There is nothing in any file or paper produced that is relevant to what we are discussing now, which is when and where the decisions were made. These documents are the padding, the filler, the bumph leading up to it. I mean no disrespect; they are important. There was the run-up to the decision, but it came to a head on the night of 28 September.

Mr. Kevin Cardiff:  It certainly came to a head.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  We know the House of Representatives in the United States failed to pass legislation on the same day, which resulted in further destabilisation of the banking sector internationally. We understand all these factors were interlinked. However, the committee is trying to get a sense of what happened, who was there and who advised, and we have not got it yet. Perhaps I will conclude. I am making my point.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The Deputy is making his point. Looking through the list of documents we did not get, I find it hard to accept what has been kept from us. For example, one of the documents we have not been provided with is a letter from the Department of Finance to the Office of the Attorney General of Friday, 13 June 2008 regarding financial stability, contingency planning and legal issues arising. Mr. Cardiff is saying this document has not been released because it is subject to legal privilege as it reveals advice from the Office of the Attorney General. On principle, I would accept that one could redact the Attorney General's advice but surely the letter that asked the questions should be made available to us. Very many documents are kept from us because they are the advice of the Attorney General. Surely, however, if advice has been given, questions have been asked by the Department. At least the committee should get copies of the questions. Would Mr. Cardiff like to comment?

Mr. Kevin Cardiff:  My advice is that I am not supposed to release legal advice. It is ultimately so mundane that I have no problem——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I do not refer to legal advice but to the questions that prompted the advice. One might take, for example, the document of 13 June.

Mr. Kevin Cardiff:  I do not have it with me but from recollection it is just a——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Why was it kept from us?

Mr. Kevin Cardiff:  It was because of the legal privilege issue. The document in itself——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  There was no legal privilege issue in regard to Mr. Cardiff’s letter although there may be an issue regarding the Attorney General’s advice and response or the part of the letter containing the advice. That portion could be redacted beforehand, as Mr. Cardiff has done in other instances. Why was that letter not given to the committee, at least in redacted form?

Mr. Kevin Cardiff:  In many cases, the letter of advice is a follow-on and consists mostly of queries in regard to previous advice given, and so forth. We felt——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Previous advice would have come because of previous questions but the committee is not being given copies of the questions.

Mr. Kevin Cardiff:  We tried to release the first couple of rounds of questions so that people — the committee — would know what the big issues were. For example, when we started the ball rolling on particular types of consideration of particular legislative routes, we released the heads on which we were asking the Attorney General to work.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  For example, if one takes the document of 20 May, “Advice from the Attorney General re financial stability”, the committee does not have a copy of the letter that went to the Attorney General. Why not?

Mr. Kevin Cardiff:  Our understanding was that it is subject to legal privilege.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Why would it be?

Mr. Kevin Cardiff:  The Chairman can imagine that we sought advice on what we could and could not release. Our advice was that we should be very cautious about releasing documentation subject to legal privilege. That document appeared to be such but I have no difficulty going back through every one of those documents and checking them individually with the Attorney General’s office. If the office says I can release them, I will.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  In fairness, last week Mr Cardiff stated he had used his editorial judgment on some documents. However, looking at the entire list of documents that have been kept from us, some of which came from the Attorney General, I believe the committee should be given copies of the letters to the Attorney General which prompted advice. I cannot see how they would be privileged.

Mr. Kevin Cardiff:  I will not try to interpret the law at third hand to the Chairman but what I will do happily is go through every one of those and ask our legal advisers in regard to each whether there is any difficulty in releasing them, having regard to the legal privilege issue. I will do that in good faith and will do it soon. I am afraid that although it will help to elucidate the technical thinking that was going on, and perhaps the kinds of priorities we had in terms of the legal advice we needed, which elucidated in turn the kind of policy thinking that was going on, I am not sure that any of them will be of shocking or huge import, relative to the information that is already available to the committee. I am happy to do that——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Mr. Cardiff should allow the committee to be the judge of that.

Mr. Kevin Cardiff:  That is fine. I am happy to do that exercise. Ultimately, I have my own responsibilities and must be the judge in regard to some of this. I will make that judgment, having consulted our legal advisers on each individual letter rather than merely going through them, if that would be of use to the committee. I will do so in the same spirit in which I have tried to act regarding the other documents, which is to try to be helpful rather than cautious.

Deputy Seán Fleming: Information on Seán Fleming  Zoom on Seán Fleming  I will let other members speak.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I welcome Mr. Cardiff and his colleagues. First, I will comment on the documentation provided to us. I am especially interested in the records of the meetings of the domestic standing group. The documentation we have is somewhat deficient and I find it difficult to accept this is all that was available within the Department. I was keen to read through the records of those meetings to see what kind of discussions took place, where different people were coming from, how decision making was reached, and so on. However, one cannot get any sense of that from most of the documentation presented. Much of it is economic commentary in terms of papers provided. Document No. 12, which refers to the meeting that took place on 22 April 2008, is the kind of detailed minute I would expect from such a high level group. It was a detailed, two and a half page minute of the meeting yet that type of minute is not available for many of the other meetings that took place. That surprises me. I find it difficult to believe provision of that kind of detailed minutes was a one-off. Perhaps Mr. Cardiff will look again within the Department to see what records there are in order that we can have a sense of what took place with that important group and throughout those meetings.

Mr. Kevin Cardiff:  May I comment on this? First, I appreciate the question and its context. Will we look again? Yes, of course. We anticipate many questions, obviously, regarding the past two years and we are going through the process of a detailed trawl. It is quite possible there are occasional documents which are not on the list. I do not disagree with the Deputy about the content being a bit summary in fashion but I will give a sense of the context. This was early 2007, into——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I am just making a point. I would like Mr. Cardiff to take another look within the Department to see whether records of those meetings exist in terms of decision making and how decisions were reached. Perhaps he could let the committee know.

Mr. Kevin Cardiff:  I will do that.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I thank Mr. Cardiff. Recently I read an insightful paper by Professor Honohan from June 2009 on the lead-up to the banking crisis. He stated, "given the evidently fragile state of the market by 2005 and the exceptional prices at which houses were selling, it is hard to avoid the conclusion that bank lending decisions had begun to lose touch with reality". That would be the sense many people had.

In some ways, Mr. Cardiff is presenting the decision regarding the bank guarantee as something that happened at the last minute and into which the Department was rushed, perhaps with inadequate advice. However, behind the scenes and for a number of years, many people had expressed serious concern about what was going on in the property market. It had been described as being akin to a pyramid scheme. In terms of the financial world it is true to say the dogs in the street were aware there were serious problems concerning what was going on in the banks in regard to the property market.

In that paper, Professor Honohan also mentioned the loan to value ratios, which were worryingly high. Other indications taken into consideration by regulators in general would include the rapid balance sheet growth. If one considers what had been happening in all the banks in the years preceding 2008, there had been rapid balance sheet growth within Anglo Irish Bank. For eight of the nine years it had exceeded the general threshold of 20% growth, which is regarded as a warning signal. When a financial institution has annual growth in excess of 20% the warning bells should go off. We know that in the case of Anglo Irish Bank in eight of the nine years up to 2007 its annual average growth was 36%. This information was known.

We know that in Irish Nationwide, for example, in six of the nine years to 2007 it exceeded the 20% figure. Everybody knew at the time that this was putting enormous pressure on the other banks. The market share of Anglo Irish Bank had increased from 3% to 18% which was putting pressure on the others to relax their lending regulations and operate in a similar fashion to Anglo Irish Bank. This was all known at the time and it is hard not to come to the conclusion that the very many people whose job it was to ensure the national financial stability of this country was safeguarded were not doing their job.

We need to keep away from the idea of naming one or two individual people. Many people were very well paid to oversee the financial stability of the country and it seems that they were not doing their jobs during those years. I would like to hear Mr. Cardiff’s view on that assessment.

Mr. Kevin Cardiff:  I am unsure how to answer the Deputy’s question. The fact is that the crisis was deeper and worse than anyone anticipated. Obviously, the performance of the Government system, including State agencies and all the rest, was not such as to stop that from happening. We set up a system. The general Irish system was such that we had a Central Bank and a Financial Regulator, each of which had a very independent position and had some limited independence from each other. The Department of Finance had a role in regard to the overall economy in terms of advising Ministers on that but was not the regulatory body. The policy makers and decision makers and so forth also had their roles, including at a political level and Oireachtas level. That system failed.

It is an open enough question as to what extent those kinds of system tend to be in a position to deal with bubbles on the way up or the way down. I do not disagree with the analysis of the Regling-Watson and Honohan reports which suggested that there were policy failures and systems failures through that period. The Governor, Mr. Honohan, appeared before the Joint Committee on Finance and the Public Service in June and made a comment that it is easy to say in retrospect that the solvency issues should have been recognised. He was of the view that the regulatory system in general should have been better structured to test and assess those issues and, presumably, to report them.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  On the issue of liquidity versus solvency, if the problem was liquidity that was something which the Central Bank would deal with. The only time the Central Bank can address the issue of liquidity is when there is the prospect of insolvency. We know that in May the NTMA was invited to provide liquidity to the Irish banks. It must have been known at that stage that the problem was insolvency rather than liquidity.

Mr. Kevin Cardiff:  No, I do not think that is the case.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Why was the NTMA invited to provide liquidity?

Mr. Kevin Cardiff:  The liquidity situation of the banking system in Ireland and internationally had been deteriorating in the months leading up to that, but not nearly to the extent that was seen later that year. There was a gradual fall off in liquidity. One can see similar patterns in other countries. For example, the Bank of England interbank lending figures for that period show a gradual but sustained reduction overall for the first nine months of 2008. The NTMA was invited not just to consider whether it could assist in liquidity terms but also if it could assist in more general terms. As a Department we were hugely grateful for its advice.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Was it not the responsibility of the Central Bank to step in if there were liquidity problems with the banks?

Mr. Kevin Cardiff:  That is generally regarded as the Central Bank’s issue.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  On what occasions is it not permitted to do that?

Mr. Kevin Cardiff:  Central banks will generally lend only against collateral. If institutions had insufficient collateral of the type that would——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  In other words, where there is prospect of insolvency the Central Bank cannot help.

Mr. Kevin Cardiff:  No, it can happen that a central bank would not want to help, even where there is a perfectly solvent institution.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  It is not about it not wanting to. It was not permitted to assist banks if there was a prospect of insolvency.

Mr. Kevin Cardiff:  Okay. There may also be situations where it is not permitted to assist banks even where there are no solvency issues.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I put it to Mr. Cardiff that it was known that there were serious solvency problems in the banks and that is why the NTMA was brought in in May of that year.

Mr. Kevin Cardiff:  No, that was not why it was contacted in May of that year. It was more that there was general pressure on the liquidity of the banking system. A question was put to the NTMA as to whether it could assist in alleviating that.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  That does not make sense. It does not add up. There is no logic in Mr. Cardiff’s response to that issue. It would seem that the NTMA was brought in because the Central Bank was not permitted to assist the banks as the problem was more serious than a liquidity problem. That would underline the fact that it was known that there were serious solvency problems in the banks. That is my reading of the situation.

Mr. Kevin Cardiff:  I may be able to answer the Deputy more directly. I was there and had the kind of discussions the committee is having. In mid-2008 there was no clear information to suggest that there was a solvency problem and there was no discussion with the NTMA which decided that we wanted it to supply liquidity to banks because we thought there was a solvency problem for which the ECB would not provide liquidity.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  The Department knew what Anglo Irish Bank and Irish Nationwide were doing.

Mr. Kevin Cardiff:  We knew that their balance sheets had expanded considerably and that they were being monitored and regulated by a regulator who was advising us on more than a monthly basis as to its view of the situation.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  The liquidity rules were changed in 2006. What was the nature of the changes and what role did the Department of Finance have in them?

Mr. Kevin Cardiff:  I have to clarify the changes. They were made in 2007 to the capital rules the regulator applied to property. Even in 2008 the regulator was still adjusting the liquidity rules to ensure banks would have more rather than less liquidity.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I am asking about 2006 when the rules were changed. A 4% ratio was required which, after discussion, went up to 4.8%, which seemed to be a weak response to a looming problem. I am asking Mr. Cardiff about the role of the Department in setting that ratio.

Mr. Kevin Cardiff:  To the best of my recollection, that was the choice made by the regulator and the Central Bank, not the Department.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Mr. Cardiff might check to see whether the Department had an input.

Mr. Kevin Cardiff:  I think the answer is that it did not but, of course, I will check.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I thank Mr. Cardiff. I move on to the decision made within the Department to set up a banking division, which decision appears to have been taken very late in the day and suddenly. It is my understanding that approximately 30 people were allocated to it. Why was that decision taken in September 2008? Can Mr. Cardiff outline some of the background to it?

Mr. Kevin Cardiff:  It was taken for two reasons, first, because the people who had been working on banking matters up to then were over-stretched and, second——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  The people working on banking matters within the Department were over-stretched.

Mr. Kevin Cardiff:  In September 2008, yes. We were working——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  How many were working on banking matters?

Mr. Kevin Cardiff:  I imagine it was about 25, but the number who had been working on matters related to the development of the crisis up to September 2008 would have been much lower. It would all have been done very discreetly by a small group. For example, a handful of people had worked on a wide range of legislative possibilities to deal with the crisis, had been involved in considering and advising on particular options. The reason it had been kept like that, certainly through the first part of 2008, was there was a concern contingency planning would be mistaken for something else, an expectation that a particular bank or banks would get into difficulty. It must be remembered that in September not only did the legislative agenda get longer, it was also clear that there was a crisis and the introduction of the guarantee and so forth gave the Department a much broader range of responsibilities and issues to deal with. The purpose in the extension of the numbers was simply to deal with the broadening workload, the deepening of the crisis and the fact that those who had already been engaged were probably close to collapse at that stage.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Did Mr. Cardiff come to the conclusion that the information and advice the Department was getting from the other agencies with responsibility in the matter could not be relied upon?

Mr. Kevin Cardiff:  Not so much that it could not be relied upon. At that stage we had a view that it was insufficient and were, therefore, reassured by the fact that, for example, PricewaterhouseCoopers had been engaged to investigate the books of the institutions. We had taken on board legal advisers to help us with our work. Merrill Lynch was brought on board. The National Treasury Management Agency was also heavily engaged at that stage.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Up until September, therefore, there would have been only a handful of people involved.

Mr. Kevin Cardiff:  Yes, a handful of people in the Department of Finance. A bigger group was in the——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  What expertise was available among that handful?

Mr. Kevin Cardiff:  It was, frankly, a very talented group of mostly general civil servants with expertise. They included economists and people like me who had been involved with financial services legislation for a long time.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  From where were the members of the wider group set up in September 2008 drawn?

Mr. Kevin Cardiff:  They were drawn from across the Department, taking advantage of the experience and background of the individuals involved. We had had a fine intake of graduates, for example, who were almost entirely economists or financial——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Would any of them have had banking experience?

Mr. Kevin Cardiff:  I do not know. One or two might have had, but not centrally. It should be remembered, as we discussed in one of my previous appearances, that we were not relying on the specific experience of finance officials of banking matters but on the expertise of Merrill Lynch, the NTMA, the legal people who had considerable expertise in banking matters and the various advisers who were doing work for the regulator, including PricewaterhouseCoopers. We were not expecting the individuals in question to have detailed specific banking experience. At that stage I imagine we had more than doubled the range of advisers available to us.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Of the senior officials responsible for the three agencies involved, Mr. Neary, Mr. Hurley and Mr. Doyle are now retired. It is the intention of the committee to call them to our meetings in the autumn to account for what happened in that period, but, as the Chairman said, we want to avoid pointing the finger at one individual — to date, the finger has been pointed primarily at Mr. Neary — because there was an army of others responsible for giving advice and direction. It is difficult to imagine that all of them were singing from the same hymn sheet regarding the bank guarantee. We do not get a sense from the documentation that in examining and rating the different options the Central Bank was of a particular view and that the regulator’s office had a different view. In many ways what the committee must do is call in some of the other senior officials in these agencies, not the top ranking officials, because I find it impossible to believe they were all asleep on the job. I imagine well educated, experienced individuals working in these agencies would have disagreed with the prevailing view of the senior officials. I wonder if there are papers in the Department or the Central Bank that would indicate a divergence of opinion on the advice available. For example, what about those whose job it was to supervise Anglo Irish Bank and the Irish Nationwide Building Society? What about those involved in the financial stability department? Presumably, there was a range of views, but we have not been given any information in that regard. I ask Mr. Cardiff about the role of the Department of Finance in the economic commentary given to the board of the Central Bank. I cannot help but ask him that question.

Mr. Kevin Cardiff:  It is a perfectly valid question.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  How independent were the Central Bank and the Financial Regulator and to what extent were their departmental or political masters dictating the tone of the advice issued publicly?

Mr. Kevin Cardiff:  That is a very good question. It is also very important for the future not only in terms of financial matters, although they are probably the most important, but our entire Irish regulatory system is based on the notion that the regulator is independent of Departments. That applies to the pensions regulator — although that is a slightly strange case — and to departmental, industry and other representatives, but the institution is independent. The Central Bank is independent and the Financial Regulator is independent. The question, therefore, becomes more or less not whether they are formally independent but whether there is an informal dependence or an informal way of passing instructions. As a matter of fact, on matters such as economic commentary that the Central Bank would give, it does not get instructions from the Department of Finance as to what it should or should not say and I doubt it would take such instructions, but it does pass things to us for comment before it issues them. Certainly, if we felt something was unhelpful, inaccurate or likely to——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Mr. Cardiff said “unhelpful”, what does he mean by that?

Mr. Kevin Cardiff:  I cannot think of a specific example but it might say it thinks growth will be 4% while we might say we think it will be 3% and we think its view should be closer to ours, and we would say so. If one is asked for one’s comment on something, one gives one’s honest view, but I am not aware of situations where instructions would be given along the lines of “we insist that” or “we feel you must do what we like”. There would be slightly more subtle situations where there is an interplay between the regulatory system and the legislative process. In those situations there would be much more engagement by the Department with it because in the end it is a Department that must advise a Minister to bring legislation to Government. On issues where legislation is concerned or——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Does Mr. Cardiff mean more the political process rather than the legislative process?

Mr. Kevin Cardiff:  People are influenced by all sorts of interactions and there certainly are and ought to be interactions between, for example, the Governor of the Central Bank and the Minister of the day. I do not know but I presume the Governor would also talk to politicians of other hues. I imagine there are various levels of contact between politicians, central bankers, regulators and the like. If there were not such contact, there would be no passage of information and advice.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  There was a situation where a Secretary General of the Department of Finance was a member of that board of the Central Bank. The Governor of the Central Bank was ex-Department. Does Mr. Cardiff accept that it would be entirely unacceptable, extremely unhealthy and inappropriate that economic commentary would have been changed at the behest of any people on the board of the Central Bank?

Mr. Kevin Cardiff:  I may have a slightly different view in that respect from the Deputy. I am on the board of the Central Bank now and I have been at a few meetings. Since I am there and because the legislation says I should be there, I feel personally obliged to play a full part. If that means I do not agree with commentary — although, I must say that has not arisen much — or if I had a serious disagreement concerning a document that was to be published on behalf of the Central Bank, I think, as a director, I would expect to say so, but I would expect to say so in the context that I would expect other directors to have their views on it as well. It has never been a legislative requirement that the incoming Central Bank Governor should have a particular background.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Equally, I could say I would expect that a number of senior people within the Central Bank and within the regulator’s office would have taken a more independent view, would have been more in touch with the reality of what was going on within the economy and would have produced reports that would have called it as it was. Surely there were people there who were prepared to bell the cat in regard to what was happening. Was it the case that some of those people had their reports rejected and sent back for redrafting?

Mr. Kevin Cardiff:  It may well have been the case — I do not know because I was not in the Central Bank at the time. If the Deputy is asking me if the Department of Finance was sending missives or missiles to people saying: “We do not like your opinion, please change it”, I cannot think of such an instance. “No” is the answer.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  There generally is not a paper trial for these things but, as Mr. Cardiff well knows, a climate can be created where a certain type of commentary is regarded as unacceptable and if people are in the habit of having their reports rejected and sent back for redrafting, they may change the tone of the report.

Mr. Kevin Cardiff:  What I am saying to the Deputy is that I am not aware of a pattern of that, where there was a general sense that a broad range of opinion at middle or lower levels of the Central Bank was being suppressed either by the senior management of the Central Bank or by the Department of Finance, but certainly there would be instances where one might think or I, as a senior official of the Department of Finance, might think the Central Bank was wrong about something and I might say so. That is a different thing from interfering with its independence. In my recollection of my time in the Department of Finance, we have tended to be particularly careful about not interfering with its regulatory independence.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  It is impossible to believe there was no independent view taken and nobody knew what was going on. That is simply unbelievable. It would be worthwhile for this committee to invite in some of those senior people who may have had different views because we should hear from them. If I could finish by asking one final question——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Yes, if the Deputy would.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  ——on the advice that was bought in by the Department from Merrill Lynch, PwC and Goldman Sachs. Has Mr. Cardiff a figure for the cost of the advice from each of those three consultancies?

Mr. Kevin Cardiff:  No, I do not. I think we might have given it at a previous meeting. Goldman Sachs was not paid for by the official system, as I understand it; there was an instruction from Irish Nationwide to ensure that it was available. I imagine that is on Irish Nationwide’s books. Merrill Lynch was paid for by the NTMA and if the Deputy will excuse me for making a quasi-guess, I think the figure was about €3 million, but we can check that.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Maybe Mr. Cardiff could check the figures for the total cost of each of the three consultancies.

Mr. Kevin Cardiff:  The third consultancy was——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  And Goldman Sachs.

Mr. Kevin Cardiff:  Goldman Sachs, Merrill Lynch and PwC.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Yes.

Mr. Kevin Cardiff:  We will check those. PwC was done by the regulator but I am sure it will give me the data.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  It still comes out of the public purse.

Mr. Kevin Cardiff:  Yes, it is very important.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I wish to wrap up on a question Deputy Shortall asked and perhaps my mind drifted at the time as I did not hear an answer to it.

Mr. Kevin Cardiff:  Maybe mine drifted.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Regarding solvency and liquidity, if there were not concerns about solvency in March or April 2008, what was the reason for the heads of the Bill being prepared in April 2008 and finalised by June 2008? Why was that done if there were no concerns about solvency? If there was a move to nationalisation, what institution had Mr. Cardiff in mind and for what reasons?

Mr. Kevin Cardiff:  Okay.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Nationalisation would not arise because of only liquidity problems.

Mr. Kevin Cardiff:  The answer to why a Bill was prepared quite so early was simply because we were planning for contingencies. There was nothing more to it than that, except that we were planning for contingencies in a financial world that seemed to be getting more difficult.

As to whether there was a particular target institution, the answer is “No”, although at that stage the legislation was in the shape of dealing with a bank and it was clear that it could be amended fairly quickly if need be. It was in a fairly outline shape at that stage, as I recall. We would have had in mind the Northern Rock example where what appeared to be very much a liquidity problem had none the less led to nationalisation, so it would not have been out of line that such legislation would have been prepared.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  There were concerns in April 2008 regarding solvency issues.

Mr. Kevin Cardiff:  No, that is not what I said.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The Department went from preparing on 29 April 2008 to having the heads of the Bill ready to nationalise a financial institution on 6 June 2008. That was a fair rush over a period of five to six weeks, to go from starting the preparation to having the heads of the Bill ready on 6 June.

Mr. Kevin Cardiff:  We thought it was good practice given that the financial world was getting much tougher for institutions. There had already been an example the previous year of a UK business with an Irish branch where we had seen people queuing in the streets, and we were anxious to have legislation prepared. Over that summer — I will be corrected if I am wrong — the shape of such legislation and how we thought it might look changed a fair bit and became more detailed, so that piece of work in June 2008 was probably more in outline terms than the final version. Perhaps the final version available to the Government in September was a bit more sophisticated or had taken account of more factors.

A UK bank went bust in August of 2007, at which time the Department of Finance did not have in its bottom drawer a Bill for dealing with such a situation. Obviously, there had been some thinking done on a what-if basis and so forth, but it seemed appropriate to us to start some continency planning. The sub-prime issues in the US, the UK experience, the continuing tightening of liquidity in the markets and the concerns one was hearing from March 2007, for example, about share prices and so forth were all contributing to a growing sense of instability, and we wanted to have a range of options available in the event that the instability worsened. It could have become much worse than it did.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Was is not the case that as late as 7 o'clock on the evening of the guarantee, senior staff in the regulator’s office were briefed that Anglo Irish Bank and Irish Nationwide Building Society were going to be nationalised?

Mr. Kevin Cardiff:  If they were so briefed, they were incorrectly briefed.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  As late as 7 p.m. though?

Mr. Kevin Cardiff:  Deputy Shortall has read the Merrill Lynch document. Nationalising Anglo Irish Bank and Irish Nationwide was very much one of the options that was being considered.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Right up to 7 o’clock that evening.

Mr. Kevin Cardiff:  Yes, and other options were being considered.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Sorry, did Mr. Cardiff say, “Yes”?

Mr. Kevin Cardiff:  Yes, and other options were being considered.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  So that was under consideration up to 7 o’clock that evening.

Mr. Kevin Cardiff:  I would imagine that all of the options that were set out in the Merrill Lynch document were under consideration.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  No, not all of the options; that option.

Mr. Kevin Cardiff:  Yes, that——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  That briefing at that time.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Deputy Shortall is getting a second wind now and Deputy Edward O’Keeffe is waiting patiently.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  I will not delay the meeting very long. I have a few questions. I thank Mr. Cardiff for attending. I am appalled and shocked to find out about the Department’s dependency on intelligence from outside agencies. The Department had and has overall responsibility. It looks after budgetary matters, Revenue and NAMA. This section is in here. Had the Department an intelligence and research department? The Department of Finance made statements about the workings of the economy and what was happening. It had intelligence on banking and all that. Would Mr. Cardiff elaborate a little on that? Where has all that, which was there in the past, gone? The Department comes across as a lame duck. Let us be straight and honest about it. The Department had no control over what was happening in this country over recent years.

Mr. Kevin Cardiff:  That is not an accurate reflection of what the Department is or was. The Department of Finance was not the regulator of the financial system and it relied for most of its intelligence on the financial system and on the people who were the regulator. That is neither exceptional around Europe nor is it entirely unexpected because that is how it has been for quite a long time.

There is a very significant question of public policy. I am not allowed to answer policy questions but perhaps I can pose one. Regularly and as part of almost every discussion that I have witnessed in the Dáil in recent years on how we control parts of the economy, we all think in terms of independent agencies to do that task with various levels of accountability and so forth. Often that accountability is to Ministers, the Oireachtas and so forth, but there is not a standard set. It raises the question whether if regulators are to be independent, they are then to be shadowed or their work duplicated by other institutions. Perhaps in some countries there is such duplication, but in other countries it tends to be duplication by different regulators. For example, there might be a central bank and a regulator doing separate oversight jobs. At least some of those countries seem to think that this has caused them difficulty in the course of the crisis in that there has been insufficient communication and collaboration between the different entities. There is certainly a question, not just whether the Department of Finance is fit for purpose but whether the purpose is the best fit for the future.

We have all been impressed, for example, by the new regulatory chief executive. When good people do good work in a regulator, one wants them to be independent. In retrospect, if something goes wrong, one does not want them to be independent. It is a quandary for Departments, Governments and the Oireachtas. As a matter of fact, the Department of Finance did not take on the regulatory role in relation to the banking system and did not consider itself in that role. I do not know whether one would regret that in retrospect. It depends on how good a job one thinks we would have done had we been doing it. Certainly, it is a different job from the one we do now.

At my last public appearance we had a lengthy discussion on the broader economy. Certainly, we want to have a Department of Finance that is well equipped for our future in order that these things, one hopes, do not happen again. Certainly, there were issues. Some, perhaps perceptive, people thought they saw things coming and other perceptive people did not. I can tell Deputy Edward O’Keeffe that a lot of good people working honourably, in the Department of Finance and in many other places, did not spot this crisis coming. It is a good question. I do not know the answer to whether Departments of Finance should have a separate regulatory arm. If we are to set it up in that way, then a corollary conclusion is that the regulators are not to be independent of Ministers and Departments.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  Am I correct in stating that the relevant legislation, which gives the Department of Finance power in respect of the Financial Regulator, is in place?

Mr. Kevin Cardiff:  That is quite right.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  The Department is an arm of the Government and, therefore, has a major role to play. The Department of Finance is the lead line Department in respect of budgetary matters, NAMA, etc. It is obvious that a breakdown occurred.

Deputy Jim O’Keeffe referred to the collapse of Northern Rock. Other institutions such as Fannie Mae and Freddie Mac in America went to the wall. The downturn in that country was foreseen and the Department should have been in position to advise the Minister and the State with regard to what was happening in other parts of the world. When America sneezes, Ireland coughs. When Bear Stearns got into difficulties, it was clear that the entire financial system was beginning to crumble. However, we continued to forge ahead. We expanded our economy at a rate that would have been suitable for a country with a population of 12 million. We continued to build houses, factories and warehouses and no one said “Stop”. In hindsight, perhaps some people did issue warnings. Deputy Rabbitte, when he was leader of the Labour Party, commented on the level of private debt in this country. It is obvious, however, that individuals in Government Departments and those working in the financial area should have picked up on what was happening. Due to the fact that no one did so, everything collapsed around our ears and we will be obliged to deal with this crisis for the next 15 years.

Questions arise with regard to the role and performance of Goldman Sachs, Merrill Lynch and PwC. We have seen the advice put forward by Merrill Lynch in 2008. I am not getting angry about this matter but I have very strong feelings with regard to what has happened to our economy and in respect of the crisis in which we find ourselves.

Mr. Kevin Cardiff:  People are entitled to feel very strongly. What has happened has been horrendous.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  Could Mr. Cardiff repeat that?

Mr. Kevin Cardiff:  On behalf of their constituents, Deputy Edward O’Keeffe and other Deputies are entitled to feel very strongly. What has happened to our economy has been horrendous. My colleagues and I will be as honest and as open as possible in trying to make the situation better and in attempting to ensure that what happened previously will not recur.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  If AIB and Bank of Ireland had not reacted to the problems at Anglo Irish Bank on the day on which they did so, what would have been the outcome? It is obvious that AIB and Bank of Ireland panicked. However, I do not know what was the reason for their panicking. How would the crisis have developed if they had not brought matters to the attention of the Government?

Mr. Kevin Cardiff:  It is difficult to say what difference it would have made. That day told its own story. The Central Bank was watching money going out of the country, etc. I do not believe it would have changed much but that is a moot point. The crisis would have occurred, regardless of whether particular individuals from AIB or Bank of Ireland had requested a meeting or lifted the telephone. The problem was becoming increasingly evident and, even if they had not made a telephone call, it would have been evident from their flows-of-funds figures.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  How much control did the Department have over the foreign borrowings of the two main banks? It is obvious that, like a pair of drunken sailors, they were just borrowing to expand the economy. That is what really happened.

Mr. Kevin Cardiff:  The Department of Finance had no regulatory control over the foreign borrowings of any of the banks.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  Was the Department aware that the banks were borrowing recklessly in respect of development and the construction industry? I am not blaming the Department, I am just asking questions.

Mr. Kevin Cardiff:  I accept that. If the Deputy does not object, I am merely thinking before I give my answers. We were certainly seeing the credit figures and we were seeing that the economy was booming. We were certainly indicating that there were risks to that. However, we did not anticipate the scale of the crisis and, therefore, we did not say that taking certain actions would lead to it being of a particular scale. It was not possible to indicate what would be the scale of the crisis.

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  The dogs in the street knew what was happening at Anglo Irish Bank for three long years before matters came to a head. However, no action was taken. Anglo Irish Bank was making credit available to business people and others without requiring them to provide collateral or without proper assessments or feasibility studies being carried out. I was previously a member of the Joint Committee on Finance and the Public Service and I am aware that people were asking questions with regard to what was happening at Anglo Irish Bank. However, answers were not being provided. It was known in the public arena that a crisis was going to arise in that bank — particularly in view of the way in which it was carrying out its business — but no one took action. That is a serious state of affairs. The Central Bank, the Financial Regulator, the Department of Finance and the private agencies involved to carry out assessments all failed to act.

Mr. Kevin Cardiff:  In respect of the dogs in the street knowing about things, it might have been better if those dogs——

Deputy Edward O’Keeffe: Information on Ned O'Keeffe  Zoom on Ned O'Keeffe  They were barking.

Mr. Kevin Cardiff:  If people had specific information, they should have picked up the telephone and called the Financial Regulator. Perhaps some of them did so. I do not know. I have not come across that. Perhaps the Financial Regulator should have spotted what was happening but that is a different matter.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The then Secretary General of the Department of Finance expressed concerns on 26 September 2008.

Mr. Kevin Cardiff:  He did.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Will Mr. Cardiff indicate what was the nature of those concerns?

Mr. Kevin Cardiff:  As I understand it, his concern was that while one could say that in light of the then state of the property market, it appeared that Anglo Irish Bank would be okay or if that market became stressed it would still be okay but that if——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The then Secretary General stated that losses could amount to €8.5 billion——

Mr. Kevin Cardiff:  He said that on some assumptions——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  ——and that losses at Irish Nationwide could amount to €2 billion. Surely that was a warning.

Mr. Kevin Cardiff:  It was certainly a warning that the situation was pretty much dependent on how bad the property market would become.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I wish to return to Deputy Edward O’Keeffe’s question in respect of Anglo Irish Bank. The presentation from that institution must take the biscuit in the context of chutzpah, sheer hard neck and lying. Mr. Cardiff described it as being overly optimistic. Is it not an offence under Irish law — it would be an offence under American law — for an institution such as Anglo Irish Bank to make a presentation such as that which it made to the Department on 18 September 2008? It was not just optimistic, it was outrageous.

Mr. Kevin Cardiff:  It was not the only outrageous thing that those at Anglo Irish Bank said or did. They were continually over-optimistic in similar terms for some time thereafter. They suggested at different times that they would be able to, for example, raise private capital. They did so even some months after the guarantee was extended. One would have to listen to them and ask if there was any possibility that they were right. However, one would not actually give it any real credit because one had to ask how they could raise such capital.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Is it an offence under Irish law——

Mr. Kevin Cardiff:  To mislead the Department of Finance?

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Is it an offence in Irish law for a significant financial institution to come in and make such a presentation, given the implications of the contagion it had caused in the other banks earlier and what it was to trigger subsequently?

Mr. Kevin Cardiff:  Attempting to mislead the Department of Finance in Ireland is not just not illegal, but is a sport in some places. The Deputies can take it that we did not particularly believe that presentation or subsequent presentations.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Did the Department just listen to it or did it——

Mr. Kevin Cardiff:  Did we jump for joy and say——

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Did the Department tell them what it thought about it?

Mr. Kevin Cardiff:  I cannot remember. Mostly, when I hear these things I listen hard and then go off and think about whether there is any reality in them. Then I try and let it feed into the overall level of information we have. Just think of a couple of examples of things that happened, and not just in Anglo Irish Bank. Not long before this crisis developed, senior people in Anglo Irish Bank and other institutions made a point of going out and buying a lot of shares in the institutions they were running themselves. I suspect, to be honest, that those purchases were because they thought things would get better rather than worse. I think even then they did not realise how much trouble they were in. Their communications may well have been disingenuous, extremely so in the case of some communications we may have received, but they probably thought that they could use their skills and flair to get through the problems. It may be that once one is far enough along on a particular course, one deludes oneself that one can go further or that one can get out of it, or whatever. Anglo Irish Bank, for example, even some months after this, was trying to persuade people of the quality of its loan book and its capital raising potential. Other institutions somewhat further along were saying, “Well, we will take Government preference shares, but you know, it is a bit of an imposition really, us needing capital”.

It certainly took a while for reality to dawn in some of the institutions. In some cases the people are likely to have been dishonest or disingenuous at least, and in other cases I think the people believed in the line they were producing. Maybe there was some mix of self-deception or an attempt to put a bright spin on it for us and maybe some disingenuousness or dishonesty in some quarters on some issues. I am not clear that it was always just downright dishonesty, but certainly things did not work out anywhere near how Anglo Irish Bank, or other institutions for that matter, expected they would. Professor Honohan’s conclusion was that they actually did not know their situation and the gravity of it. That was his conclusion, having done a fairly detailed trawl. We all delude ourselves a bit, I am afraid, and some of these guys did it more than the rest of us.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Impaired loans as a percentage of total loans were declared as 0.52% in September 2008.

Mr. Kevin Cardiff:  That is one of those cases where, if one wanted, one could mix disingenuousness with self-delusion. Impaired loans is an accounting treatment that is in large part controlled by the institution itself. It is supposed to adhere to particular standards and so on, but those can probably be shaded considerably by either wishful thinking or deliberate choices. Also, the percentage is a point in time estimate that is based on the performance of the loans at that point in time. Take Anglo Irish Bank as an example. It had a fairly significant number of projects where even if it was paying nothing, impairment would not arise because the terms of the particular contract were that during a development phase or for the first year or two or whatever, there would be no contractual payment due. In other words, it was interest free for a period and that was made up for later. Therefore, if one wanted to delude oneself, one could look at one’s impairment figures and say: “Joe Bloggs is not impaired. He has not paid me any interest, but he was not supposed to.” A better figure might be one’s watch list, which should be one’s own institution’s assessment, not of impairments but of which cases one should be keeping an eye on. Anglo Irish Bank’s watch list at that stage was also very small. I do not know the exact figure, but it was just a low percentage. It was not particularly big.

At that stage, Anglo’s official position as presented to us and to PricewaterhouseCoopers and others was that it did not have a particular impairment problem. That almost does not matter. Those figures are relevant in particular circumstances, but if one is about to have the greatest property crash one ever could, the fact one is currently unimpaired does not mean that the following year one will not have a huge impairment problem. The scale of the problem depends on the scale of the crash and on the strength of the security that is behind those things. I do not know if it is in the Anglo Irish Bank document in question or some later Anglo Irish Bank document — I think it is in the one we are discussing- that Anglo Irish Bank said it had a loan to value ratio of 75%, which means it would have assumed that a 25% fall in property values would leave it reasonably comfortable, even then, with the security it had.

In fact, the property value fall from peak to trough, according to the indices — which one cannot always trust — was well over 50%. If one has a loan to value ratio of that mentioned, one’s security then becomes hugely inadequate if the loans do not perform. Also, if the customers are all dependent, or if many or most of them are dependent, on the property market to be able to repay the bank, then the bank has a problem. First, the borrowers cannot repay and then the security becomes of importance, but at that point the property market has also undermined the level of the security. Therefore, there was probably a period in terms of the loan to value ratio figure — I do not know if the one provided was true at the time; that depends on the quality of the valuations — when each institution had a potential period in which a certain amount of self delusion could be possible, because one always had this loan to value cushion. However, that cushion eroded and eroded. One can imagine a theoretical point — I am sure someone could do the formula — where having been nice and comfortable all along, one suddenly reaches the point where one becomes very uncomfortable very quickly.

I honestly do not know and am not going to say who I think was lying to me and who was not, for fear I get it wrong. However, I think there was a lot of lying to themselves or at least persuasion of themselves that things were better than they were.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Is Mr. Cardiff saying that when they were answering questions or passing on information to the regulator, notwithstanding what was happening in the marketplace, they did not tend to write down the loans at all, that they gave them a balance sheet figure?

Mr. Kevin Cardiff:  No. What I am saying is slightly different to that. What I am saying is that impairment is a technical concept and one does not impair a loan until such time as it does not meet particular criteria. Some of the banks also said the loans were IBNR, impaired but not reported. This was a way of saying that some of the loans were likely to be impaired and while they could not put a specific number on the number of loans, they thought a particular batch was likely to be impaired. There are accounting limits. One is not supposed to make that figure very big, even if one thinks one has a lot of problems coming down the line because this figure is supposed to be related to the performance of loans rather than to expected difficulty.

The watch list of an institution should be better. It should be made up of the cases that an institution needs, in its judgment, to keep a close eye on. That should not be any use as a statistical tool because different institutions would have different criteria. However, it should be a crucial internal management tool. At this point, as of the time these particular decisions were being made, the Anglo Irish Bank watch list was very small. It does not imply that it had internally admitted that——

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Does Mr. Cardiff wish to comment on the story on the front page of the Irish Independent today about what Anglo Irish Bank was doing on the very day it was nationalised?

Mr. Kevin Cardiff:  I was too frightened and concerned about my appearance here to read the newspapers today. If the Deputy wishes to tell me what was said, I will comment on it.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  It reported that a loan of some €17 million was granted to a company connected to the former chief executive on the day the bank was nationalised, in order to purchase a property, I think, in the south of France. I do not know if that is a fair summary.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  It was a top-up loan of €2.6 million on a loan of €14.6 million. It is GUBU stuff.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I acknowledge that is not a fair question as Mr. Cardiff has not read the newspaper report.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  In fairness to the Deputy’s question, if the bank was nationalised that day and if people from the Department were embedded at that stage, how could that transaction have gone through?

Mr. Kevin Cardiff:  The Department had no one embedded on 29 September 2008.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  On the day the bank was nationalised?

Mr. Kevin Cardiff:  No, we did not have people embedded that day.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The Department had no up-to-date information?

Mr. Kevin Cardiff:  We did not have details on small loans, no.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Mr. FitzPatrick was using it as his own personal piggy-bank and there was no knowledge of a top-up loan?

Mr. Kevin Cardiff:  The reason for the nationalisation was in large part due to Government concerns about the governance and standards of behaviour in Anglo Irish Bank.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Deputy Rabbitte raised this matter. Were restrictions not placed on the bank on the day it was nationalised? On that very day, the bank was able to extend a top-loan to somebody who was in over his head.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  According to the newspaper story, records reveal the company subsequently drew down almost €17 million of the €17.2 million made available by Anglo Irish Bank and the money was to purchase a plush, €10.25 million villa on the French Riviera.

Mr. Kevin Cardiff:  I do not wish to comment because I do not know the detail. However, this is precisely the kind of issue that a commission of inquiry might well investigate.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Is the Department aware of all these details? Has it asked questions and received explanations? This is GUBU stuff, as I said.

Mr. Kevin Cardiff:  I do not have any information about that particular issue. On the nationalisation of Anglo Irish Bank, the Department commissioned a due diligence process which examined issues about the governance and standards applied in Anglo Irish Bank. Having seen that due diligence process, the Government decided that the bank ought to be taken out of the control of those who were controlling it. The Government did so in the knowledge there also existed practices and ongoing issues with which the Government was not comfortable with, so to speak, and neither was it comfortable with the current management having control. That implies that those issues of governance and so forth were to the fore even at the very last minute in that process. Without knowing the actual story or even about how accurate it is, one assumes that this would reinforce the Government’s view on the matter, that certainly there were issues of governance. If the committee members recall, the banks were about to be recapitalised. There was a process of due diligence done with regard to each of the institutions before that happened and in that context and in the context of the regulator’s reports to the Government and so forth, it was decided that the safer action, having regard to those governance issues, was not to give capital to Anglo Irish Bank to do with it what it wished but instead to take the bank into State control.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  To return to the nationalisation issue, we have seen the paper in respect of April and a building society. When was such a possibility in respect of Anglo Irish Bank given serious consideration? When was the legislation adapted so that it could apply to Anglo Irish Bank as easily as to a building society?

Mr. Kevin Cardiff:  Through the middle of 2008 the Department was doing work on nationalising a credit institution. For the purposes of the legislation, the working assumption was that it would be a bank but we would have been aware that it would need adaptation if it were to be a building society. Due to the specific difficulties associated with Irish Nationwide at the beginning of September 2008, the specific work carried out for a week or two was tailored to Irish Nationwide or to a building society — to Irish Nationwide. The Department had been planning for how this would be done with regard to public communications, bearing in mind the possibility that the same planning would apply to other institutions. At some stage in or around that time, in other words, approximately two weeks — maybe even three weeks — into that September, we formed the view that this Anglo Irish Bank business model was an uncomfortable looking business model which might equally be a problem and we ensured that the bank nationalisation options were updated. The legislation which we had prepared would also have allowed for other things such as guarantees and liquidity supports and so forth.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Deputy Edward O’Keeffe asked about what would have happened if the two traditional banks had not come calling on 29 September. Reading the papers, the Department had all this preparatory work completed but the Department seemed unable to say what might trigger its implementation. The Department seemed to have considered that along the way.

Mr. Kevin Cardiff:  None of the institutions had a solvency problem so far as their basic figures were concerned. A solvency problem would arise from what would happen in the potentially near future but nonetheless, in the future. We did not expect that any one of the institutions would run into a problem with its regulatory capital, in other words, that any institution would be able to report at any given time in the near future at least, that it met all the Basel capital requirements directive standards.

The likely trigger for a crisis in an institution would be the possibility that an institution would not be able to get cash on any particular day. This was a bigger problem for Anglo Irish Bank than for any of the other institutions because its loan book was mostly related to commercial property, even where it was lending to someone to run a hotel, for instance. The security, the basic shape of the loan, was around the property.

With a bit of financial engineering, one could bring a bunch of ordinary residential mortgages into a shape sufficient to bring to the European Central Bank and offer them as collateral in order to ask for a loan because one was a little short of liquidity. At that time, one could not package the kind of commercial mortgages and other liens held by Anglo Irish Bank into something that could easily be brought to the European Central Bank.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Were commercial loans disqualified in terms of the ELA?

Mr. Kevin Cardiff:  They need to be capable of being packaged, not necessarily in terms of ELA but in terms of European Central Bank standard access to liquidity. Two weeks before the guarantee, Anglo Irish Bank could probably have packaged up €1 billion or €2 billion. Its liquidity losses for that period were much greater than that so it could not package enough to be able to get ECB money. If one took Bank of Ireland or AIB, even if it could not get money on the market, it had considerably more than it could package up for the ECB and, therefore, it would have more time to deal with a crisis, more time for things to happen. In that month, even if there were no differential issues about credit quality — we knew there were, but even if there were not — the different shape of the Anglo Irish Bank loan book would have meant that one would automatically regard it as the likely first problem, except for the fact that there had been this reputational hit to Irish Nationwide in terms of its solvency. So, one thought of two there, namely, Irish Nationwide, because the writers had said it was insolvent or could be insolvent, or was in insolvency talks, and therefore, there was a potential for disruption around that, and Anglo Irish Bank, because it had this uncharacteristic type of loan book which made it more difficult for it to access liquidity when it needed it.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  With the benefit of hindsight, what does Mr. Cardiff say, if he had taken his courage in his hand and he had done the preparatory legislative work? If he had nationalised Irish Nationwide and Anglo Irish Bank that summer, would it have averted the disaster he was confronted with on 29 September?

Mr. Kevin Cardiff:  It is a retrospective assessment, and it might even be self-serving, but my best view is that it would not have averted the need to provide guarantees because of what in the end a depositor wants to know. It can help to set a tone that an institution is State owned, but if it is State owned because it has been in trouble, then what the depositor really wants to know is whether his or her money is safe. The Government took the view that depositors in Irish banks should be able to consider their money safe.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Okay.

Mr. Kevin Cardiff:  The question is whether one could have gotten away without a guarantee. The assessment of the time in September, the Merrill Lynch assessment, was even if one nationalised, one needed to guarantee. If one went some months back, could that nationalisation have averted a crisis? Not by itself. Nationalisation with very severe remedial work might have helped.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Returning to the question of the Department and the regulator, was there a difference of view as the crisis progressed? Was the Department of the view that the line coming from the regulator was simply not sustainable? The Chairman referred to document No. 6, where the regulator states that there is no evidence to suggest that Anglo Irish Bank is insolvent on a going-concern basis and Mr. Doyle states that he assumed the exposure in Anglo Irish Bank could be €8.5 billion. Were the Department and the regulator on different tracks at this stage?

Mr. Kevin Cardiff:  We met almost constantly and were in very close proximity to each other. One could just imagine that, naturally, in a sense, it was we who would have to ask a Minister to ask the Dáil to write a cheque and maybe we had a bit more concern for that issue, but I do not believe the regulator’s view was anything other than honest. We probably were a bit more sceptical at that stage, yes.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  There are several papers involved. In September, there were advices to the Minister. I refer to document No. 16. The recurring paragraph is prominent there. It is dated 17 September. That was very late in the day. It states:

If I were the Minister for Finance coming back from holidays — I am not suggesting that he was or that he was not long behind his desk at that stage — I would have read with interest what was happening in the United States in Lehman Brothers, AIG and all the rest in the memo and so on, but that paragraph would have given me some comfort, for example, that there was fog in the channel and the Continent was cut off, and that maybe we would come through it if we kept our head down.

Mr. Kevin Cardiff:  That view would have given some comfort, that is true but it wasn't an unqualified view. Everyone knew the whole level of stability in the financial system was being greatly undermined, by international and domestic developments, and that therefore there could not but be a serious problem to be dealt with. On the fact that there had been a building up of financial buffers over a number of years, as was stated by the Governor, obviously there was some comfort in that. Clearly they were not nearly good enough, at least not in one case.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  It is a little more than that, is it not? That is extraordinarily upbeat, on 17 September, “Irish banks are well capitalised, are highly liquid and have built up good financial buffers over a number of years of strong financial performance.” Let me put the question a different way. Was the regulator accepting at face value information furnished by the banks, even at that late stage?

Mr. Kevin Cardiff:  The regulator accepted it at face value. That is true, but it was not uncritically in the sense that one can look at a bank balance sheet and say that it looks good, but one does not look at it in isolation. The regulator, as well as everybody else, was fully aware at that stage that there was a serious lack of stability in the global and, especially, the Irish financial system, and there was no one trying to deny that.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  PwC did not seem to have improved the situation a great deal. It seemed to take at face value as well. Talking about retaining a dog and barking oneself, we have not got the figure for what we paid PwC, but it came out of the public purse. PwC did not come back with a great deal that was insightful, did it?

Mr. Kevin Cardiff:  PwC came back with a great deal more detailed information than had been available and its process was much more detailed. It was significantly more sceptical, for example, it did not take on face value the Anglo Irish Bank management’s picture of what it expected to happen, but as it turned out PwC was still far short in the end in its assessment of what actually happened, of where the final picture was.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Mr. Cardiff made a similar comment in respect of Goldman Sachs and Irish Nationwide. He said something like the property loan book was no worse than any other. I am bemused. One would not have needed the skills available to Goldman Sachs to form the view that it was an outrageously optimistic statement to make about Irish Nationwide.

Mr. Kevin Cardiff:  I do not want to answer for it. In fairness, it is not here to answer for its own assessments.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I know, but in so far as the Department and the State system has been relying on these guys to come back to us with information that might safeguard us, it is not very impressive for them to talk about the management in Irish Nationwide being a bit concentrated.

Mr. Kevin Cardiff:  Maybe I understated what they were saying.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  For 30 years in this town, some of us knew how concentrated it was. Nobody in the regulatory system seemed to be interested in reducing that concentration.

Mr. Kevin Cardiff:  Some efforts were made, but I do not know how far they got. In fact, I think the Honohan report deals with that issue. The advice we were getting from Goldman Sachs was heavily qualified by the fact that it was basing its information on discussions with management, etc. The more detailed later work by PricewaterhouseCoopers was more independent and more sceptical of what institutions were saying. That, in part, was a function of the time available to do the work.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I will wind up. Can Mr. Cardiff interpret for me the minute of the briefing given to the Minister on 26 September, when the house was already on fire? On the question of who should be protected in any interventions, the note refers to depositors in serious debt and possibly dated subordinate debt.

Mr. Kevin Cardiff:  My recollection of that meeting — I have to admit the various meetings are starting to blur into one — is that the significant question which arose related to who should be guaranteed if a guarantee were to be introduced. Various options were considered. The entire balance sheet could have been guaranteed indefinitely. The two axes of this debate were the liabilities that should be guaranteed and the length of time for which they should be guaranteed. One could decide to guarantee all the liabilities of Joe Bloggs bank, which has some liabilities that go out for a week, some that go out for a month and some that go out for up to ten years. If one were to guarantee the deposits only, potentially one will have declared that the bank is in such a serious crisis that it requires a guarantee. However, the bondholders might seek to run out the door. It is harder for bondholders to do so because it is more difficult for them to cash in their bonds. They sometimes have legal ways of doing such things. If one guarantees bonds, one has to make a choice in terms of timing. One can guarantee all existing bonds, some existing bonds or new bonds only.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I understand that.

Mr. Kevin Cardiff:  That is what the discussion was about.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I could understand if the note referred to “senior debt” or something like that. However, there is a specific reference in it to “dated subordinate debt”. What was the specific thinking in that regard? Was it thrown about that dated subordinate debt might not be guaranteed?

Mr. Kevin Cardiff:  To be clear, at that meeting there was a specific discussion about whether dated subordinate debt ought or ought not to be guaranteed, in the case of a blanket-style guarantee. No specific conclusion was reached at that meeting, but there was a specific discussion. The key consideration was whether there was a sufficient crossover of interests between the purchasers of ordinary bank debt and of subordinated bank debt. It was considered that one might ruin the possibility of raising ordinary bank debt by leaving the holders of subordinated bank debt with a significant loss. In other words, if they were the same people, how would they react to being burnt on the one hand but not burnt on the other hand?

Another issue that arose in the same discussion, or around the same discussion, was a slightly more technical and legal one. It related to what would happen if a subordinated debt holder took a loss. If such a person owned €100 million of subordinated debt from Joe Bloggs bank, but the Government guaranteed the senior debt, he or she would take a loss if something went wrong. A technical issue arises at the point at which one takes that loss. It depends on the contracts, etc. It is fairly common. The fact that one has taken a loss on one’s subordinated debt would constitute an event of default for the holders of the senior debt. The senior debt holders would be able to demand repayment on their debt because the subordinated debt holders had taken a loss. Nobody expected this issue to arise in practice, but if one is giving people a guarantee, it is not a question of what will arise in practice — it is a question of what might arise.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Is it fair to say that neither the Department nor Merrill Lynch favoured a blanket guarantee at that time?

Mr. Kevin Cardiff:  No, I do not think it is fair to say that. It is fair to say the Department brought together all the options and presented them as best it could to the Minister and the Government. I am not sure what Merrill Lynch’s position was at that stage. Merrill Lynch said there was no right answer but, taking the documents together, the guarantee was the quickest means of making the greatest impact, although certain risks were associated with it. A legal risk that was associated with the guarantee — it has turned out to be fine — was a key concern at the time. We were concerned that if we were to issue a guarantee, there would be a day or two when the guarantee would not have legal force in Ireland. During that time, it would be no more than a pledge of the Government to bring a matter to the Oireachtas and to seek legislation. There was always a danger that in those two or three days, there would be a significant market event or a statement by some person in a foreign treasury that he or she did not believe the guarantee would hold water legally. There was always a danger that the credibility of the guarantee would be undermined in that period. Although one might be able to enact the legislation two days later, that would not matter. That is how crucial things were. One of the considerations with regard to the credibility of the guarantee was that we had to ensure the gap between the announcement and the enactment of the legislation would be very small, so that the market would not consider it as a risk to be taken over a lengthy period of time. In addition, the guarantee had to be legally robust. We spent a good deal of the time available to us reflecting on the issues like the status of the guarantee in the context of Irish law, the Constitution and EU law. We knew that if the guarantee was the way to go, credibility would be the big issue. It was a question of whether people would believe the guarantee. That was where much of the consideration arose. Funnily enough, it was not a question of whether we could afford to pay €440 billion, because no one expected us ever to have to do that. It is a question of whether there is a danger the Government will not live up to its obligations as laid down in the guarantee and if the market can rely on it to do what it takes to meet the guarantee terms. If the market thinks there is a way for the Government to step away from the guarantee or an external force such as a European legal view, for example, would undermine it, it cannot sign up to it. The credibility issue presented one of the big risks with the guarantee. As it happens, because we were able to get the legislation through quickly, the Oireachtas was able to sign up to it quickly and the appropriate European approvals were able to be given relatively quickly, many of the credibility issues were dealt with, but they presented a real risk at the time. Guarantees are used much more broadly in Europe now. Within two months they were used much more broadly in Europe than was the case on the day we introduced the guarantee; therefore, the credibility issues were not as broadly tested around Europe as they have been since. A judgment that had to be made was whether we could do it reasonably professionally, well and quickly to avoid these pitfalls. All of these issues were feeding into the consideration of the options. Merrill Lynch’s view is clear, but it did not have any option that did not require a government standing behind banks to a high degree. Even the SLS option, in effect, is a different way of guaranteeing bank debt.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I thank Mr. Cardiff. I did the same sums as Deputy Fleming in terms of the documents. What is Mr. Cardiff’s expectation on whether another big tranche of documents will be made available to the commission of inquiry that could not be made available to the Committee of Public Accounts?

Mr. Kevin Cardiff:  The commission of inquiry has a number of advantages over the Committee of Public Accounts. First, it has powers to seek documents and so forth that might get me off some of the hooks I am on in terms of——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Pardon.

Mr. Kevin Cardiff:  The commission of inquiry has various powers to seek documents. In some cases, as that will obviate any legal obligations I have, it might get me off a hook or two. I might be wrong, but I do not imagine the commission of inquiry will seek legal advice. If it does, we will try to be as helpful as we can. As I understand it, its term is to be extended beyond the night of 29 September to the point of nationalisation. That is a big logistical job for us because by then we had many more people creating paperwork, but we will do that logistical job. I presume there will be more papers in this regard. We are still doing a departmental trawl to make sure we can be as comprehensive as possible in terms of the papers we have up to 29 September. I presume a lot more documentation will be available to the commission of inquiry on the chronological extension implied by the terms of reference.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  At the height of the crisis, with stock markets falling, unemployment rising and the bank system on the verge of collapse, the Department was concluding a public service pay deal.

Mr. Kevin Cardiff:  Does the Deputy think we were overly generous?

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Deputy Michael McGrath is next. There is a question outstanding about the cost of the consultants used. Mr. Cardiff said he was unable to provide the information.

Mr. Kevin Cardiff:  What I said was that I might have provided some of it in my previous appearance before the committee. I will certainly make——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Will Mr. Cardiff update us on costs before the end of the meeting?

Mr. Kevin Cardiff:  I do not know whether we can do it by the end of the meeting, but we can certainly do it, I hope, by the end of the day. Perhaps Ms Nolan might step out and get the information.

Ms Ann Nolan:  I will see if I can get it.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Document No. 9 relates to the meeting held on 22 September 2008 on liquidity and how to provide a war chest. There was a concern about outflows. The document is redacted, but I presume there are two institutions involved. Anglo Irish Bank is mentioned subsequently as having requested facilities of €7 billion, but that did not happen because the crisis had been temporarily averted. Is that correct?

Mr. Kevin Cardiff:  No, things kept getting worse. There was not a situation in which anyone would have given €7 billion to Anglo Irish Bank or anyone else just for the asking. There was a necessity to go through processes. Anglo Irish Bank asked for €7 billion but it did not need that sum at the time.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  It did not get it anyway. In the following month, October, there was the dodgy €7.5 billion transfer from Irish Life & Permanent to Anglo Irish Bank which resulted in Anglo Irish Bank producing results in December 2008 that showed it in a more favourable light. Was there any link between the €7 billion mentioned on 22 September and the €7.5 billion transfer to Anglo Irish Bank a few weeks later?

Mr. Kevin Cardiff:  No.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  When did the Department become aware of the transfer of €7.5 billion?

Mr. Kevin Cardiff:  Give or take a day or two, 24 October 2008.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  When was the Minister informed?

Mr. Kevin Cardiff:  I cannot recall. It was certainly not straightaway. The regulator was informed straightaway.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Why was the Minister not informed?

Mr. Kevin Cardiff:  This was one page in a lot of documentation. The regulator was informed. It did not state in the document that it was an inappropriate transaction but that it was a particular transaction, of which one should be aware. The Department contacted the regulator as the appropriate authority. The regulator looked into the matter.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Was Mr. Cardiff sufficiently concerned that he referred the matter to the regulator?

Mr. Kevin Cardiff:  Yes.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Why was the Minister not informed?

Mr. Kevin Cardiff:  The matter was being properly dealt with by being referred to the regulator.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I find that incredibly inept.

Mr. Kevin Cardiff:  It certainly was not inept. If one comes across a regulatory issue, the correct thing to do is to tell the regulator.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The transfer in question was of the extent of €7.5 billion and Mr. Cardiff was so concerned about it that he referred it to the regulator. However, he did not tell the Minister. When was he informed?

Mr. Kevin Cardiff:  I cannot recall the date on which the Minister was informed.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Will Mr. Cardiff get the date for us?

Mr. Kevin Cardiff:  I do not know if I can because I do not know the exact date but I will certainly do what I can.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Right.

Mr. Kevin Cardiff:  There is nothing inept about seeing an issue and trying to explore whether it presents a problem.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  That is Mr. Cardiff’s opinion, but it would not be mine.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  I welcome Mr. Cardiff and his colleagues. As a number of my questions have been asked, I will not repeat them. In response to Deputy Rabbitte reference was made by Mr. Cardiff to the Merrill Lynch memorandum of 28 September. He quoted the option of giving the guarantee as being the best, most decisive and the one which would have most impact from a market perspective. He made some comments about the downside risks also which were identified by Merrill Lynch. To what extent does he consider these risks have materialised? Is it fair to say in general that they have not materialised and that this copperfastens the Government’s decision at the time?

Mr. Kevin Cardiff:  I am not allowed legally to support a Government decision or say it was wrong. I can give an indication of what has occurred since. First, there has been no call on the guarantee; therefore, that, in itself, is not an issue. A guarantee puts a Government in a situation where it can never let there be a call on a guarantee; therefore, it must support the institutions with it. The question revolves around whether, by giving the guarantee, the Government would not have had to support some institutions which it otherwise has had to support. It is certainly clear that if one wants a surviving banking system, most institutions in that system need to be supported if they are in trouble. They need to be supported not just partially and then let go but supported fairly wholeheartedly. I do not know if members can work out a policy comment from that. Reports have been commissioned whose authors were entitled to answer that question. The Honohan report states the guarantee was necessary. In the end, markets and governments expect that where significantly sized institutions are in difficulty, governments do step in. It is not so much a question of the guarantee but a question of what the counterfactual position would be if there were no guarantee and other supports had to be provided at similar or greater levels. The answer is certainly that the banking system as a whole would not have survived in anything like its current shape, or in any sort of healthy shape, without significant Government intervention, either on 29 September or within a few hours before or after that date.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  The presentation from Anglo Irish Bank to the Department on 18 September caught my eye in addition to that of Deputy Rabbitte. It is one of the most creative works of fiction I have seen. Some interesting excerpts refer to the bank adopting a style of old-fashioned banking, that there was central approval of every loan, that all lending was secure and cross-collateralised with personal recourse. Mr. Cardiff mentioned a loan to value figure of 73%. Deputy Rabbitte raised the issue of impairment. In 2009, the bank anticipated an impairment charge of 0.7%. NAMA has since acquired tranche 1 of the Anglo Irish Bank loans at a discount of 55%. The issue of an impairment and the discount applied by NAMA are not quite the same but their comparison gives an indication of the extent to which the business plan was a work of fiction.

PricewaterhouseCoopers was commissioned to assess the quality of Anglo Irish Bank’s loan book. When did it come on board to start that work? Was it commissioned by the Financial Regulator?

Mr. Kevin Cardiff:  I am trying to recall accurately. The work of PricewaterhouseCoopers was in three or four phases. The first phase started pretty much in mid-September. That was, in the time available, a fairly basic and quick look at figures, the liquidity position and the overall shape of the loan book. As time went on, it did much more detailed work. Most of the work done after the guarantee was on the loans, the borrowers and the stresses that could be withstood. In the third phase, professional valuers were brought in to evaluate some of the properties underlying the loans. I understand they considered the biggest loans. In Anglo Irish Bank, the biggest loans presented the biggest problems.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  However, in the lead-up to the guarantee, PricewaterhouseCoopers only had a very short window of a couple of weeks and was, therefore, not able to have any meaningful input regarding the quality of the loan book.

Mr. Kevin Cardiff:  Yes.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  It is interesting that the Merrill Lynch memorandum of the same date, 28 September, states it is important “to stress that at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised”. This sounds very like the quotation from the middle of September that the Department received in its memo. Right up to the day before the guarantee, the advice from Merrill Lynch was that all of the Irish banks were profitable and well capitalised. From an analysis of the balance sheets of the banks, if taken at face value, this was correct, but it did not factor in the losses coming down the tracks in respect of the banks’ property books, despite the fact that property values at the time had already been in decline, at least for some months. Was the consistent advice to the Department that, right up to the eve of the guarantee, all the banks were well capitalised?

Mr. Kevin Cardiff:  Yes, but the Deputy implied the difference or the subtlety. That was absolutely the fact on paper but I do not believe Merrill Lynch, PricewaterhouseCoopers or any other body said there were circumstances that were not troublesome. They did not say there was nothing to be worrying about. It was clear that there was a real financial stability problem to be addressed and that, if credit market conditions, property values or the ability of institutions to collect on their loans deteriorated, the problems would get bigger. It was more a case of determining the position at the time. That banks had significant capital buffers made some difference. The two largest banks are now trading with adequate capital according to the Financial Regulator, assuming Allied Irish Banks will complete its sale of assets. The banks have required a certain amount of Government capital for this but their own capital buffers played some part. The Anglo Irish Bank capital buffers turned out to be entirely inadequate given the nature of its loan book and what has happened in the markets in which it was lending.

Some points in the Anglo Irish Bank document to which the Deputy referred do not hold water. I refer to the reference to good old-fashioned banking.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  On the issue of Anglo Irish Bank, whose job was it to state the business model being adopted was unsustainable? Was it the job of the Financial Regulator, the Central Bank or the Department to recognise it was a train about to crash?

Mr. Kevin Cardiff:  The Financial Regulator is supposed to supervise and look after the health of individual institutions.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  Would the impact on the overall economy have pertained more to the Central Bank?

Mr. Kevin Cardiff:  Yes, if there is a broader financial stability issue.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  Merrill Lynch noted liquidity for some of the banks could run out in days rather than weeks. It is clear the driver of the guarantee on 29 September and 30 September was the issue of liquidity. It was the immediate priority.

Mr. Kevin Cardiff:  The point that would determine whether all our citizens would be able to take money from the bank machines in a week or two from the time in question was the immediate liquidity position. It is absolutely the case that liquidity was the chronological priority.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  From reading through the documents in the file, one did not get the sense there was an issue that had to be dealt with in the dying days of September. What changed on 29 September that meant an immediate decision had to be taken overnight to put a blanket guarantee in place? It is clear from Professor Honohan’s report that there had been an intensive series of meetings involving the stakeholders for a number of months. What happened on the day in question that meant a guarantee had to be put in place immediately?

Mr. Kevin Cardiff:  One could probably identify five or six different things that went wrong that day that had not gone wrong as of the previous night. There were further banking collapses in Europe that were being worked on but I suppose we did not know about them over that weekend. I refer to Fortis in particular. I referred already to the TARP non-adoption. On that particular day, the availability of funds even to the best Irish banks was severely challenged. They had buffers as the bigger banks had enough money to get by, but certainly there was a change of tone over that weekend and on that day. The signal from the stock market on that day was very negative and, therefore, was likely to exacerbate that funding problem. Anglo Irish Bank actually ran out of money on that day.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  That is my final question. How imminent was the threat of a complete collapse of at least that institution and what was the contagion effect on the others? Governor Honohan outlines in his report the options that were examined, such as the extensive use of emergency lending assistance from the Central Bank, the use of a domestic fund drawing on additional resources from the NTMA, temporary support from the two largest banks and so on. He said in a footnote on page 14 that none of these options could be expected to do more than buy a few days until the following weekend. Was the advice at the time to the Government that there was a serious risk of an imminent collapse of at least one of the main institutions, which would have had a knock-on effect on all the other institutions and ultimately lead to the potential collapse of the whole banking system? Is that where we were on that night?

Mr. Kevin Cardiff:  I believe so. If somebody had not made additional liquidity available to Anglo Irish Bank overnight, then it could not have operated legally the next day. Some decision had to be made right then. There was no particular reason we would not have had to make a similar decision the next day, if the decision was to give Anglo Irish Bank a €4 billion facility. There was no reason we would not have had the same call to make three or four days later to give it another €4 billion, another €4 billion and a further €4 billion. Other than Northern Rock, European banks had not been publicly availing of these emergency facilities at that time. It was the emergence of the emergency facility that was the immediate trigger for the difficulties with Northern Rock. It was certainly a risk that had to be taken into account. Even if Anglo Irish Bank had been put on some sort of short-term life support, it would need more not long after that, and the knowledge of this would become known to the market and would trigger difficulties for the other institutions. It would certainly seem to be the case that a significant decision had to be made on that day, which had to take account of one institution but also of the potential impact on others. There were risks in every direction, but there were also various options to cope with those risks.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I would like to return to my previous question about document No. 9 on the meeting of 22 September. Prior to that, you said that Anglo Irish Bank made a presentation on 18 September. Who from the Department and the other agencies was available for that presentation?

Mr. Kevin Cardiff:  I do not think I recall the meeting, but I believe it was myself from the Department and I am not sure who accompanied me. I do not think there were representatives from other agencies. I can check that out.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Were you on your own?

Mr. Kevin Cardiff:  I do not know, but I will check it out.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  There was a major presentation from Anglo Irish Bank and you possibly were on your own.

Mr. Kevin Cardiff:  I do not think I was on my own, but I will double check.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Are there any minutes of the meeting that might refer to who was present?

Mr. Kevin Cardiff:  I will see if I can find something that shows who was present.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  It is important because on 22 September, Anglo Irish Bank was looking for a possible €7 billion, only four days after stating that things were reasonably okay. Were any conclusions drawn from the rosy picture of 18 September to what happened four days later?

Mr. Kevin Cardiff:  It was clear that financial institutions in general, but especially Anglo Irish Bank, were having increasing difficulties with their liquidity position. It was also clear that the picture was much too rosy and that therefore, there were serious issues to be examined.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Did any alarm bells ring about the total reversal of the situation between 18 and 22 September? Did any questions about solvency enter into your mind?

Mr. Kevin Cardiff:  Document No. 6 shows that officials from the Department, the Financial Regulator and the Central Bank were asking the question about whether the figures on these loss exposures were capable of being sustained if things got a lot worse than they were at that stage.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  So there was an issue of solvency at that meeting of 22 September.

Mr. Kevin Cardiff:  There was certainly an acknowledgment of a danger, assuming things went badly wrong, that there could be——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  That is why I referred to Mr. Doyle’s comments about a possible €8.5 billion for Anglo Irish Bank and €2 billion for Irish Nationwide Building Society.

Mr. Kevin Cardiff:  There is no one taking——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  These were potential loss exposures.

Mr. Kevin Cardiff:  There was no one saying that just because Anglo Irish Bank handed us a presentation, everything was all right. We were not relying on Anglo Irish Bank for our view of Anglo Irish Bank. We were talking to regulators and all sorts of advisers and others, so we were not relying on the bank.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Surely, if the guarantee was introduced on 29 September on the basis of liquidity, somebody must have been very blind on 25 September if he or she could not see from the figures that there was a question of solvency. Coupled with that, we had the absolute deceit from the Anglo Irish Bank presentation on 18 September, while on 21 September it was known there would be a possible €7 billion required to keep it running. Not only should alarm bells have been ringing at that stage, the sprinkler system should have been on. It was running out of control.

Mr. Kevin Cardiff:  That is what we were doing. We were——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  You still based your guarantee on liquidity on 29 September. That is the point I am making.

Mr. Kevin Cardiff:  We based “our” guarantee — I am not supposed to comment on the decisions of Ministers — on the basis of the situation as it presented itself, including the mix of risks, the mix of potential options, and how those two interacted. I do not think it would be accurate to say that we were totally oblivious to solvency issues, or that we had a fine picture of how the solvency would come undone over time and that we therefore had perfect knowledge. We were somewhere in between those two extremes.

The sprinkler systems had been running for several weeks at that stage. There was not a sense in which this suddenly arose on one night and nothing had been done and no discussions had taken place beforehand. As members can tell from the technical preparations, meeting notes and so on, there was a concerted effort to deal with the crisis.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  To return to the presentation by Anglo Irish Bank, all we know at this stage is that Mr. Drumm and Mr. Cardiff himself were present. We do not know of any other parties. Is that correct?

Mr. Kevin Cardiff:  I will see if I can find out who was there.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Surely you would have a memory of it.

Mr. Kevin Cardiff:  In those four weeks I had six, seven, eight or ten meetings a day. I honestly do not remember in detail and I am not sure I can provide that information. Frankly, some of the documentation would be better, from a historical point of view, if it were clearer, but over that few weeks it was not possible to stop and write notes of everything.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Did those from Anglo Irish Bank ever do this in relation to you Mr. Cardiff before?

Mr. Kevin Cardiff:  Never.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  And on this occasion they telephoned and said they wanted to come in and talk to him?

Mr. Kevin Cardiff:  It is in the public domain — it is no secret — that I had only ever met Mr. FitzPatrick once, and that was relatively shortly before that time. I do not recall whether I had met Mr. Drumm before, but certainly in non-crisis times Anglo Irish Bank had never come near us, as far as I can recall. Indeed, Mr. FitzPatrick’s comments in the newspapers and so on would suggest that he did not really believe in us, in our regulation or in our regulatory systems. It is easy to make much of something a guy says, but they were not people who would tend to appear at the Department of Finance from time to time, although others would. If, for example, there was legislation they wanted to influence or they had technical difficulties with a piece of legislation, or just to keep in touch, other institutions would have a mode of contact, usually through the Irish Banking Federation, but also directly. However, this particular one tended not to come anywhere near us. Maybe on the tax side there might have been contact, but I do not recall it, to be honest.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  To return to the meeting with Mr. Drumm on 18 September, Mr. Cardiff is not sure of who was there along with himself and Mr. Drumm. Roll that on to the disclosure of the €7 billion and the guarantee on 29 September. After that there was the nationalisation, and Mr. FitzPatrick resigned in December. Deputy Rabbitte raised the issue of top-up loans and so on. What interaction was there between the Department of Finance and Anglo Irish Bank after 29 September? At that stage, Mr. Cardiff knew that what he had been told was a pack of lies.

Mr. Kevin Cardiff:  Most of the interaction immediately after that time was via the regulatory system, but obviously after the nationalisation there was a great deal more contact.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Then there was the issue of the €7.5 billion from Irish Life & Permanent being transferred to Anglo Irish Bank. You felt it was a matter for the regulator. Yet when I asked you earlier when alarm bells rang with regard to the regulator, you said there were questions on the days and weeks leading up to 29 September. Still, you were happy enough to allow him to investigate the €7.5 billion transfer from ILP to Anglo Irish Bank. I do not understand that at all.

Mr. Kevin Cardiff:  I can understand what you are saying, Chairman. Let us think about where we were on that occasion. First, there was not a red flag saying that this was a big problem. An issue was raised on one page of a report by PricewaterhouseCoopers which——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Involving €7.5 billion.

Mr. Kevin Cardiff:  The number was not the issue. If that had been €7.5 billion which was properly and correctly raised by an institution in the interbank market, there would be no issue.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  But you had concerns, which you did not tell the Minister about. Instead, you passed it on to a regulator in whom, you admitted earlier, you did not really have full confidence.

Mr. Kevin Cardiff:  I do not recall exactly what I said earlier about whether I had full confidence. It certainly seemed appropriate to pass information about a potential regulatory issue to the regulator. What else does one do about a potential regulatory issue? I did not know it was a regulatory issue because it had not been——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The first thing I would do would be to tell my boss — that is, the Minister.

Mr. Kevin Cardiff:  The fact of the matter is, we did not.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  And you have yet to confirm when he was first told?

Mr. Kevin Cardiff:  As I told you, I do not remember when he was first told and I cannot confirm it without going back to check.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  Would it be in a memo or whatever?

Mr. Kevin Cardiff:  No. In that context, so much went on over such a short period that not everything was in a memo. We can certainly try to find out the first time the Minister saw a document. The Minister has already said, in the Dáil, when he saw it for the first time. Perhaps the simplest way is to go back and check the Dáil record. If I do not remember the answer to a question, I will just say——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I know that, but I find it incredible that this chain of events happened and there did not seem to be a controlling hand from the Department of Finance.

Mr. Kevin Cardiff:  The hand of the Department was intensively engaged in trying to find a resolution to a major national problem. You will see the level of engagement in the papers you have received from——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  In some of the papers we have received.

Mr. Kevin Cardiff:  ——early 2008 and earlier, through the crisis during September and in the period afterwards. People worked very hard to ensure that our system remained safe and stable. The origins of the cost of Anglo Irish Bank go back further than the period we have just been talking about. The country has ended up having to absorb a major cost for a financial institution, and that should never have happened. In that period we certainly worked extraordinarily hard to mitigate and deal with the issues.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  All I say——

Mr. Kevin Cardiff:  There were so many——

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I will hand over to Deputy Shortall soon.

After the night of 29 September, the whole thing still rolled on. Mr. FitzPatrick got his top-up loans in January 2009, months later; there did not seem to be any controls in a bank that was nationalised in the intervening period. That is all I am saying.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I will add to that by saying that after the introduction of the bank guarantee, the domestic standing group took a holiday, it seems, for five months, and did not meet, which seems extraordinary.

Mr. Kevin Cardiff:  It is not extraordinary at all. If those people were in the same room almost every day for a month, they would not stop after four hours to convene the domestic standing group and have the same discussion for another four hours. It is simply that the nature of the interaction became so intense that separate and discrete domestic standing group meetings did not——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I only have the schedule of meetings before me. That is the only information I have and, according to that, the domestic standing group took a five-month break.

I have a question about something in the minutes of a meeting of the domestic standing group on 22 April 2008. It is stated that the Department emphasised the importance of market-based solutions in time for the end-of-June half-year figures. Can Mr. Cardiff tell us exactly what market-based solution the Department had in mind? What was that intended to address?

Mr. Kevin Cardiff:  Without trying to say exactly what this line is about, what we were anxious to ensure as a Department was that in the event there were difficulties for any institution, we would try first and foremost not to have that impinge immediately on the public purse. The hope and attempt would be, if there were a crisis in a particular institution, particularly a smaller institution, to find a market-based solution or somebody else in the market who would deal with that issue. In other words, in more normal times what tends to happen in financial institutions that get into difficulty, particularly smaller ones, is that some other party——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  These were not normal times.

Mr. Kevin Cardiff:  At this stage, the times were becoming more and more abnormal but they were not such that one would as yet give up on the prospect of some such approach.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  The Central Bank outlined the implications of increased reliance on ECB funding. There was the timeline of the end of June looming for the half-year figures. It is very hard to know how, in the circumstances, there could have been a market-based solution other than the kind of creative accounting that Anglo had been engaged in, so what exactly was the Department talking about in regard to market-based solutions?

Mr. Kevin Cardiff:  It was certainly not talking about creative accounting because creative accounting does not solve financial problems, if that is the Deputy’s concern. At this stage, there were various consultations ongoing in this forum and we were concerned——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  In the circumstances that pertained at the time, what kind of market-based solution could there have been?

Mr. Kevin Cardiff:  Depending on the issues that arose, if there was, for example, a shortage of liquidity for a particular institution, it would be much better from the public purse point of view if other institutions provided that rather than the public purse providing it. It would be a matter for any institution which was likely to be short of liquidity to address that issue and to go out and find market solutions for its problems.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Did the Department believe any of the banks would have been in the position to give billions of euro to one of the other banks at the time?

Mr. Kevin Cardiff:  At the time, all the larger ones were in a position to have positions at any given stage that would be in the hundreds of millions and more with other institutions. However, that position changed quite radically between then and——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  That sounds very much like massaging the figures.

Mr. Kevin Cardiff:  I am not saying that——

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  None of them was in a position to do anything other than what would have amounted to massaging the figures.

Mr. Kevin Cardiff:  I do not think that is true. Any bank with a liquidity difficulty at this stage — early 2008 — could do a range of things. It could ascertain whether there was a potential purchaser — someone who would want its deposit book, liked the look of it and might take it over. It could seek to package its loan book in such a way as to make it marketable to the public — for example, it could engage in an asset-covered securities operation. It could market itself more actively either to other institutions in the Irish market or abroad, with a view to raising money in that way, despite perhaps having to pay a lot more interest to get that money. Therefore, there was a wide range of market-based solutions that could arise if an institution was in difficulty at that point.

The Department of Finance would have been very anxious that nobody involved in any of these processes would form the view that the Government should be the first and easiest route of access for support. I would imagine, if the Deputy is asking what we had in mind, those were presumably the sorts of things we would have had in mind at this point in time in regard to dealing with institutions which had difficulties.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  They are options that are available in normal times but certainly not in 2008. I would have thought that would have been known within the domestic standing group.

It is very easy to get bogged down in the detail of this, and there is a tendency to view this as some sort of academic issue. The reality is that the horrendous mistakes that were made are having a hugely negative impact on the lives of thousands of people in this country.

Mr. Kevin Cardiff:  Yes.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  For that reason, it is important that there is actual accountability for those serious mistakes. It seems the bottom line is that the banks ran rings around everybody who was supposed to be responsible for regulation in this country and for ensuring our financial stability. If so, this raises the most serious and fundamental questions about the competence of the Minister, the Department, the Financial Regulator and the Central Bank, or else there was something more sinister at play. Either way, it is the job of the Committee of Public Accounts to establish which one it was. I hope we can do that in the autumn.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  Did the bank chiefs argue for a guarantee on the night of 29th?

Mr. Kevin Cardiff:  I am not sure if I am supposed to discuss what happened at a meeting between Ministers but, basically, yes. I am not saying that is all they argued for, and they might have had competitive issues or issues in regard to other institutions, but a guarantee was certainly on their minds.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  I presume we can take it the Department regarded the Merrill Lynch document, for example, as confidential and sensitive material and that the representatives of Bank of Ireland and AIB would not have had any knowledge of the advices available to the Department before the meeting of 29th.

Mr. Kevin Cardiff:  I believe not. I do not believe anyone in the official system would have had any reason to show those documents to the banks concerned.

Deputy Pat Rabbitte: Information on Pat Rabbitte  Zoom on Pat Rabbitte  They would have had restricted circulation in any case.

Mr. Kevin Cardiff:  It would have been very tightly restricted. Even within the Department of Finance, we were not discussing why parts of the team were spending a lot of extra time external to the Department. People assumed the budget had been brought forward and the lights burning late were just related to that. This was kept very tight.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  I thank Mr. Cardiff and his officials for attending. Unfortunately, due to events that evolved during the meeting, we expressed our concern that we did not get as many documents as we would have liked. We are working in a semi-vacuum, if one likes, and we identified areas where we feel we should get documents in regard to issues that were put to the Attorney General. The committee would like to have sight of copies of the questions that went out, while understanding that the advice coming from the Attorney General would be confidential, as well as of the other documents to which reference was made. We will await delivery of them as quickly as possible and consequently, I believe we will be obliged to resume our hearings at a future date. We hope to get sufficient information to enable us to do our business and carry out our responsibilities.

That said, we will not dispose of chapter 7 of the Comptroller and Auditor General’s report. However, I believe two outstanding items, namely, Vote 6, Office of the Minister for Finance, and chapter 6, European Union, financial transactions 2008, may be disposed of. Is that agreed? Agreed.

We will adjourn until 16 September 2010. In the meantime, we hope to receive as much documentation as we believe we should get.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I was not provided with figures on the cost of the consultants. Did the witnesses manage to retrieve them?

Mr. Kevin Cardiff:  I beg the Deputy’s pardon. Payments made by the NTMA to Merrill Lynch, including all its work, totalled €7 million.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  A total of €7 million was paid to Merrill Lynch.

Mr. Kevin Cardiff:  Thus far, Rothschild has been paid €1.4 million. The Financial Regulator has paid €2 million to KPMG and more than €750,000 has been paid to PricewaterhouseCoopers, as well as some smaller amounts to Deloitte and Ernst & Young. The Financial Regulator levied fees totalling €3.4 million on the relevant institutions under the guarantee and the Department also levied fees, which we can get for the committee.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  I understand that Arthur Cox received approximately €3.5 million.

Mr. Kevin Cardiff:  While Arthur Cox is not on this list, it probably is of that order. Sorry, it does appear and the amount is greater, as €7 million was paid to Arthur Cox.

Deputy Róisín Shortall: Information on Róisín Shortall  Zoom on Róisín Shortall  Arthur Cox and Merrill Lynch each received €7 million.

Mr. Kevin Cardiff:  Yes.

Chairman: Information on Bernard Allen  Zoom on Bernard Allen  The Department should send a letter to the committee detailing what was paid to the accountancy firms, as well as to the legal firms that were involved in this process.

Mr. Kevin Cardiff:  Yes.

The witnesses withdrew.

The committee adjourned at 2.22 p.m. until 10 a.m. on Thursday, 16 September 2010.


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