Brendan Burgess advises against Government Guarantee

This is a transcript of an interview on RTE Six One News on the 16th September 2008. Later that evening, the government increased the Deposit Protection Scheme to €100,000. You can watch it on the RTE website at . If you have difficulty watching this in Firefox, switch to Internet Explorer

From the preceding clip
Dobson: The crisis in international financial markets deepens this evening. The collapse of Lehmans and ongoing uncertainty about insurance giant AIG has prompted a massive sell-off of financial shares .

Irish shares took a hammering for a second day with AIB and Anglo taking the biggest losses.

Lee: The shock waves following the collapse of Lehman Brothers have rolled on. The money markets have frozen. Banks have stopped lending to each other.

Share prices have nose dived with the ISEQ down by 4% and banks particularly badly hit. But Irish Life and Permanent and Anglo were down by twice that amount.

Dobson to Lee: How much of this is due to collapse in confidence and how much is due to the way markets operate?

Lee: The money markets have stopped operating.

When you see Lehman Brothers going, no one is going to be able to save everybody, …they are all beginning to panic

Dobson: What about the impact of this on the real economy:
Lee: It’s mixed in one sense . All you can say is that this doesn’t help . and it impacts on confidence. I’t s not good at all.

Among the growing economic crisis, here there have been calls from the opposition for greater protection for Irish bank customers.

Brian Lucey: Nobody quite knows unfortunately what the value is of the assets that the banks hold. There is a lot of noise in that system. Until we get clarity on that , the reality is that the volatility will continue.

The Labour Party is calling for the greater protection of customers of Irish Banks.

The Departmen of Finance said that the current protection rates are being reviewed at an EU level

The interview
Dobson: These are obviously very uncertain and difficult times. First of all there is the question of the guarantee for depositors in Irish banks. That is 20k. So some of your money is guaranteed by the banks themselves?

Brendan Burgess: Yes. 90% of your money in an Irish bank is guaranteed up to a maximum of €20k. So if you have €20k in an Irish bank and something happens you will get back €18k.

If you have 100k in an Irish bank, the guarantee is limited to 20k, so you will get back only €20k. You will lose €80k.

Dobson: As Joan Burton was saying there, there are different thresholds depending on whether it is a foreign bank or an Irish subsidiary of a foreign bank (Note: Joan Burton and many others were calling for increased guarantees)

The Irish banking system adheres to the European minimum. And my own view, my personal view on it would be that this is the appropriate amount.

There is no such thing as a free guarantee. If you raise the guarantee to 50k which the Danes provide, in the end consumers are going to pay for that. So all of the banks contribute to that fund. If an Irish bank goes to the wall , which is very unlikely, the rest of the Irish banks will bail them out and personally , I would be more concerned about someone with €10k on deposit than someone rich enough to have €100k on deposit.

Dobson: If you have €100k and you want a absolute guarantee you can go to the Post office which is state guaranteed or Northern rock?

Me: Northern Rock is guaranteed by the British government and Post office savings Certs are guaranteed by the Irish government and that is still a valuable guarantee.

Dobson: Is it not unthinkable that an Irish government or any government would allow a retail bank, a major retail bank with all these branches and with all these customers to go under?

Brendan Burgess: I don’t think it’s inconceivable at all. The Government regulates Irish banks but the government does not and should not guarantee Irish banks and that is a very , very important distinction.

If banks behave badly in their lending or if they are reckless in their management or whatever, they should be allowed to go to the wall and that is a fact of economic life.

It would have an effect on the economy but giving some sort of soft guarantee to a badly managed banks would be irresponsible and very bad news for the long term

Dobson: What they are all saying from the Central Bank down , even the international rating agencies are saying that there isn’t a reason to worry about Irish banks. They are very sound.

Brendan Burgess: Irish Banks are very well regulated.
Irish banks are very sound

They don’t have direct exposure to the sub-prime borrowers in the US
which is what the big worry is.

The risk to an Irish bank is panic . If everbody felt that a particular bank was going to go and they all rushed down to take their money out. . That would create a liquidity problem.
And you could have a very fine solid bank getting into difficulty. Jus like Northern Rock – it was a solvent bank with a liquidity problem.

Dobson: “Just finally …Irish bank shares are down at where they were in the mid 80s. Is that a buying opportunity?”

Brendan Burgess: I think we are going to look back in a few years time at the state of the Irish banks and the Irish stockmarket generally and say how did we not fill our shoes with those shares.

I might regret saying that later

Dobson: Brendan Burgess on your head be it.

So two years later, what do these comments look like?

I said that there is no such thing as a free guarantee, and I have been correct in this. Consumers have paid for it in spades.

I said that the government should not guarantee Irish banks. I think that has been proven correct.

I said that it was not inconceivable that the government would let a major bank go. Most people would agree now that they should have let Anglo and Irish Nationwide go.

I said that Irish banks were well regulated. That was clearly wrong in retrospect. As Chairman of the Consumer Panel I had been very critical of the failure of the Financial Regulator to take action on consumer issues. Their prudential supervision activities were obviously not open to public scrutiny. I assumed and so did everyone else, that they were actually supervising the banks well.

I said that Irish banks were sound. I was wrong, but I don’t actually regret saying it. What else could I say? The correct thing to say was “Although the Financial Regulator and the rating agencies and the government are all telling us that the Irish banks are sound, there has been a run on Anglo and Irish Nationwide in the past few days, so customers should get down there tomorrow and take out all their cash and move it to Rabo which is the only bank with a AAA rating operating here.”. If I had said that, I would have been proved spectacularly right as Anglo and Irish Nationwide would have run out of cash within 30 minutes of opening the following day.

I was asked if this was a buying opportunity for bank shares. I pointed out that we might look back in a few years time at Irish banks and the stock market generally and wonder why we didn’t fill our shoes. This was a live interview and I was asked to come in to talk about the guarantee. This question was a surprise. If it was a recorded interview I would have told them that it was not appropriate to discuss shares in a television interview. And that someone should buy a diverse portfolio of shares and that any one share or sector was risky.

However, the advice is not nearly as bad as it has been made out to be. Since that date, there has been a 90% drop in the price of financial shares. However, the ISEQ general index had closed that day at 3,693. As of the 6 December it’s 3,689.
I had said in the Askaboutmoney Guide to Savings and Investments that people should have a diversified portfolio of Irish shares but not more than 20% in financial services. Anyone following that advice would be down, at this stage, around 20% since my “fill your boots” comment, . And I did say, “we are going to look back in a few years’ time”.

Check out the transcript from the Quotes from the Irish Property Bubble

“Irish banks are very well regulated, Irish banks are very sound….. [...] we’re going to look back in a few years at the state of Irish banks [and ask] how did we not fill our shoes with those shares?”

It just goes to show what selective editing can do. Leave out all the bits about advising against increasing the limit on the deposit protection scheme. Leave out the bits that Irish banks which fail should be let go to the wall. Leave out the bit saying “and the Irish stockmarket generally”. Leave out what I said after that “I might regret saying that later…” Stuff the bad bits into one continuous sentence and it looks like an unconditional recommendation for Irish bank shares.