Recap: Inside Ireland’s Financial Crisis, by Kevin Cardiff, Liffey Press, €19.95, ISBN: 9781908308825
During my brief career as a civil servant I once heard a senior official of the Department of Finance say that he wished to have the epitaph “Covered at last” inscribed on his tomb. “Covered” would have been a more arresting and revealing title for Kevin Cardiff’s apologia pro vita sua than Recap, which has the stale air of a civil service memo.
Indeed much of the book is a rehash of the memos and briefings prepared by Cardiff during his time as deputy secretary and later secretary general of the Department of Finance. The book is based on Cardiff’s evidence to the Oireachtas banking inquiry, whose report could be summarised in Horace’s line Parturient montes, nascetur ridiculus mus. In both Cardiff’s book and the report of the inquiry everybody was to blame so nobody was to blame.
The book opens dramatically as Cardiff is being driven at speed through the streets of Paris, accompanied by police outriders, to a meeting of the heads of state and government of the euro zone in September 2008. He is accompanying Brian Cowen to the meeting and seems disappointed that, while the taoiseach is greeted on the steps of the Élysée palace by Nicolas Sarkozy, he has to endure being hustled with other officials through a back door. The meeting is to discuss the crisis in the euro zone which almost led to the collapse of the currency. We are not told what Brian Cowen contributed to it. Perhaps he sang “The Lakes of Pontchartrain” to alleviate the strain of the crisis.
Cardiff tells us that, as head of the tax and financial services division in the Department of Finance, his job for the previous year was to “watch, report and prepare, as strains on the Irish banking system slowly increased”, but for just over a month he had been “trying to cope with a real crisis”. The quality of this “watching and preparing” is indicated by the fact that he told an official at the US embassy that the run on deposits in Irish banks was “based mostly on rumour and innuendo about Irish banks rather than any hard facts”. Cardiff does not refer to Morgan Kelly’s November 2007 article in The Irish Times pointing to the fact that the lending of the Irish banks to builders was considerably greater than their deposits and that a bank crisis was inevitable.
Cardiff’s comments on the infamous “Night of the Guarantee” tell us nothing that we did not already know. He seems to have accepted the banks’ barefaced lie that they faced a liquidity crisis when they knew they were insolvent. While Cardiff gives the impression that Brian Lenihan as minister for finance relied completely on his civil service advisers, including Cardiff, and accepted their analysis and advice, David McWilliams wrote that, in a private meeting with him some days before the guarantee Lenihan had said of his officials: “They just don’t get it; we don’t have much time.”
Cardiff does reveal the significant fact that, going in to the meeting that led to the bank guarantee, Brian Cowen seemed to have a preference for a pre-emptive guarantee. This of course is what the banks wanted and got. Cardiff suggested that Anglo Irish Bank and Irish Life and Permanent should be nationalised and a more restrictive, and therefore less costly, guarantee be provided to the “pillar” banks, Bank of Ireland and AIB. Lenihan seemed initially to favour this approach but, after private consultations with Cowen, agreed to the blanket guarantee. We must accept that Cowen was no better informed than anybody else in the room on the state of Anglo Irish, despite having dined with his close friend Fintan Drury, a director of Anglo Irish, and Sean Fitzpatrick, the bank’s managing director, a month earlier. Mr Drury told the banking inquiry that the dinner at his home was to enable the Taoiseach to meet some “very smart people” to discuss “emerging issues on the economy”. Mr Drury said that he had invited Mr Fitzpatrick because “he was seen as someone who was extremely bright”. It does not seem to have occurred to Mr Drury to invite David Drumm to his select soirée, despite the incandescent brightness of Mr Drumm, whose ribald humour might have lightened the proceedings.
After the bank guarantee was announced, Cardiff and his colleagues relapsed into the bureaucratic complacency from which the crisis of September 2008 had briefly shaken them. Brian Lenihan announced that the Irish bank guarantee would be the cheapest in history. But the complacency is short-lived as Cardiff and his colleagues see Anglo Irish Bank transform before their horrified gaze into an economy-eating zombie. As deposits flood out of Anglo Irish, the Irish Central Bank does not have enough funds to replace them and must seek emergency liquidity assistance from the European Central Bank (ECB). Under the rules of the ECB, this money must first be repaid by the Irish taxpayer and then “extinguished” lest it add to the money supply in the euro zone. Thus were born the infamous “promissory notes”. The ECB gave €30 billion to the Irish Central Bank, who put it into the black hole of Anglo. The government then issued promissory notes which obliged the Irish taxpayer to pay €3 billion every year for ten years to the ECB, who would then take the €30 billion out of circulation. This was equivalent to burning €30 billion of tax revenue to “rescue” Anglo. Cardiff did not seem unduly perturbed by this arrangement, which would have continued had not the 2011-2016 government liquidated Anglo and turned the promissory notes into long dated government bonds. The taxpayer will still ultimately bear the cost of Anglo’s collapse but over a longer period and at a lower interest rate.
Cardiff writes at length on the issue of burning the bondholders and confirms that the ECB pressurised Lenihan to repay the bondholders in full, including the bondholders in Anglo, despite the fact that the Anglo bonds were trading at junk bond prices. While the banking inquiry made much of the pressure exercised by Trichet on Michael Noonan when he proposed a fairly timid “burden-sharing” with the bondholders, Cardiff reveals that Timothy Geithner, the US treasury secretary at the time, also vetoed any burden-sharing. The IMF was prepared to impose losses on bondholders, as it had done in many other banking rescues, but the ECB adamantly rejected any burden-sharing fearing that the shaky edifice of the euro would collapse if all holders of euro bonds were not fully repaid.
The most unsatisfactory aspect of Cardiff’s book is that it plunges into the banking crisis without explaining the context in which it occurred. While the collapse of Lehmann Brothers precipitated a global banking crisis, Ireland’s banks would have faced a crisis in any event, having borrowed vast sums from European banks after Ireland entered the euro and lent them to “developers”, causing the construction industry to mushroom to fifteen per cent of GNP when the average for developed countries is around five per cent. When the inevitable property bubble burst the banks would be insolvent and have to be rescued or allowed to fail. Astonishingly the Department of Finance seems not to have considered that bank failure in Ireland was possible: bank resolution legislation was not enacted until 2011, three years later.
Another factor that contributed to the overall economic crisis in Ireland is not mentioned by Cardiff at all. That is the huge increase in public expenditure, mainly on public sector pay rather than on improved services, which was funded by increased revenue from property-related taxes. When the crisis hit in 2008, Cardiff was being paid more than his German counterpart, the governor of the Central Bank, John Hurley, who had no qualifications in economics or finance, was paid more than the chairman of the Federal Reserve and the taoiseach was paid more than the German chancellor or the president of the USA. When the revenue from property-related taxes dried up it was inevitable that public expenditure would have to be drastically reduced.
Cardiff lavishly praises his fellow public servants for their efforts during the crisis though he discreetly glosses over the resignations of John Hurley and Patrick Neary, the financial regulator. (Hurley and Neary resigned after their public appearances during the crisis left those who saw them unsure whether to laugh or weep.) All the officials Cardiff works with are dedicated, hard-working and, it is implied, of the highest intellectual ability. If this were the case why did they not see the crisis coming? Cardiff’s high opinion of his competence and that of his colleagues was not shared by the Finnish finance expert Peter Nyberg appointed by the government to investigate the Irish banking crisis who concluded that “the Department of Finance did not see itself as concretely involved in financial stability issues and did not have the necessary professional staff for this”. Nyberg also found that “had the Department of Finance taken a greater interest in financial market issues early on, preparations for dealing with financial crisis would have been more comprehensive”.
In response to these criticisms Cardiff employed a retired Canadian public servant, Robert Wright, to review the Department’s operations. A key question which Wright addressed was whether Department of Finance officials perceived the threat of the economic and banking crisis and warned ministers of it. The Wright Report states that “there are examples of where such advice was tendered in writing. We have also been advised of some important oral briefs that reinforced the department’s concern about pro-cyclicality. But these are not part of the official record.” When the finance expert and columnist Cormac Lucey asked a member of the 2007-2011 government about these briefings, the minister replied: “What warning? Given by whom? When?” The Wright Report also states apropos the property bubble that the Department’s assessment of the risk of a bubble was “at least as strong as any public analysis over the period”. Wright provides no evidence to support this. The Economist, Morgan Kelly, David McWilliams and Damien Kiberd all pointed to an imminent bursting of the bubble, but the only published views of the Department of Finance were in the various Economic Reviews that it published each year and these remained bullish about the prospects for the Irish economy up to the summer of 2008, when Irish bank shares had already lost half their value.
Cardiff’s far from gripping saga ends happily for him, if not for the Irish taxpayer. He was appointed secretary general of the Department of Finance in 2010, in time to cede Ireland’s economic sovereignty to the Troika. But his time at the top in Finance was short-lived as he was nominated by the government to the European Court of Auditors in 2011, presumably because he was an uncomfortable reminder of the dark days of the crisis. His departure to the Court of Auditors was marred by the objection of some MEPs to his appointment on the grounds that he would be auditing the funds given by the EU to rescue the Irish economy, which he himself had negotiated. But with the stalwart support of Irish MEPs, particularly of Proinsias De Rossa, Cardiff shook the dust of Merrion Street from his sandals and departed to Brussels on a salary of €244,000 with €40,000 “installation expenses” and the guarantee when his term expires of €20,000 “resettlement expenses”. And when he retires he will receive platinum-plated pensions both from the EU and the Department of Finance, which he would no doubt justify in the words of a famous shampoo advertisement.
After Cardiff’s departure, the Department of Finance spent €85,000 hiring international recruitment consultants to find his replacement. The consultants found that the most suitable candidate, deputy secretary of the Department of Finance, John Moran, had been sitting in the next door office to Cardiff all along.
In a magnanimous gesture, Kevin Cardiff has donated the royalties from his book to charity.
Sean Byrne lectures in Economics at the Dublin Institute of Technology. His main areas of interest are International Economics and Globalisation.