David McWilliams to give evidence at the Banking Inquiry - time changes

Brendan Burgess

Brendan Burgess

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I see that David McWilliams is due to give evidence on Thursday 26th Feb.

http://inquiries.oireachtas.ie/banking/ (The committee meets on the blue days. Click on any day to see which witnesses are scheduled)

I am astonished by his topic:

09:30 David McWilliams on early warnings, divergent and contrarian views

I would have thought he should be included in the section on the media and asked why he recommended and welcomed the guarantee so enthusiastically.

Brendan
 
Up to that point he spoke about the boom as being a transfer of wealth between generations, maybe they plan on blaming the pensioners for the crisis instead of the real culprids similar to your previous lamentations on the Greeks eh?
 
Hi gillarosa

Sorry that post seems very garbled to me. What point are you making?

gillarosa said:
the real culprids similar to your previous lamentations on the Greeks eh?
Click to expand...

Sorry, but I don't see what my lamentations on the Greeks have to do with the McWilliams' guarantee.

Brendan
 
Whether you think the Guarantee was good, bad or inevitable it is undeniable that DMcW had a significant input into the decision. The Guarantee practically reproduced what he advocated the Sunday before in the SBP and he hailed it as a "master stroke", and we know Lenihan was eating garlic out of his hands.

This is a bit at variance with the narrative in the excellent drama The Guarantee which suggested that it was Biffo who was pushing for the Guarantee against Lenihan's wish for nationalisation of Anglo. Biffo's evidence will be very interesting when it comes. Meanwhile I agree wholeheartedly that DMcW should be quizzed not merely as a so called "expert" witness but someone who was quite central to the thought processes of the leading player in the drama who himself is unfortunately no longer with us.
 
McWilliams has been given more time , and so will start at 9 am tomorrow instead of 9.30

I am surprised at what they plan to discuss

"Chairman Ciaran Lynch TD: “David McWilliams is a well-known economist, writer, journalist, lecturer, broadcaster and documentary maker. Tomorrow, the Committee will focus on early warnings, divergent and contrarian views in relation to Ireland’s boom when it hears from Mr McWilliams."

They should be focussing on his encouraging Brian Lenihan to provide the guarantee contrary to the advice being provided by the civil servants and his assertion that the guarantee wouldn't cost us a cent.

Brendan
 
Early warnings, devergent and contrarian views

The Irish economy was set up to fail.
I saw this before anyone else.
I tried to warn people this as often as possible.
The house price bubble would burst and damage the banks. (not sure of exact wording)
I did this in thousands of words.
In the Indo and in the SBP. I made documantaries about this. I had my own show on TV3 which was.
The Pope's Children was the best selling non fiction of the decade.,
The banking crash was absolutely predictable.

This was not isolated thinking.
many thousands of ordinary people saw this coming.
so it was predictable and preventable.

So why did I not just play the game , keep my mouth shut and get on with business.
There is a moral imperative, a patriotic thing to do, to point out that the country was going into catastrophe.
I was accused of being unpatriotic for talking down the economy.

Ireland is split between the insiders - banks, developers, professional classes and government officials, and political parties
and the outsiders in the situation of the housing boom - the people who are forced to play a game where the dice are loaded against them from the start.

two reasons
1) I believed that hundreds of thousands of ordinary people would have their lives destgroyed by debt and negative equity
2) The second reason is that I I worked in theCB and outside in investment banking. Every single day we avoided taking responsiblity for a crisis, the more we ran out of options.

The crash was inevitable - why?

Because of the ways the banks financed themselves
I wrote this back in 2000,2001
This was obvious to anyone who was trained.

The panic of 2008 did not have to happen. It was not preordained. It could have been

If you don't have a housing boom. YOu dont' have a banking crisis. YOu don't have a bailout.
 
A bank run is called a run, because it happens very fast. It's not a stroll

When I saw this in 2004 (that Ireland was funded by hot money )

It began in 2000 not 2008

The crash was not the problem - it was the build up.

There is a direct link between villifying those who are warning and the

Think of it as a forest fire. The pyromaniacs (the banks) start the fire. The forest is the general ecomomy. The regulators are the firemen who say - dont' worry, it will blow itself out. a village is burnt out. The village leaders (the politicians) don't know what to do.

Who started the fire?

Property markets only increase with credit. Not with supply and demand.
When the banks ran out of deposits, they borrowed other people's money to lend to us to buy houses. Germans French and British. Hot money. One of the largest banks took 100 years to have a €60b balance sheet, but doubled it in the following three years.

lIght tough regulation guarantees you ahve a problem. Hot money leaves. and the rest follows.

"The free market will discipline the banks" they don't. They do the opposite.
Overlending facilitates overborrowing
Back in 2003. I am going to play a clip on Prime time in Oct 2003
"The housing market is a scam - it's a vacuous confidence trick. The price is 10 times the average wage. This is an economic failure due to irresonsible lending" Financed by overlending and not demand.
 
"They should be focussing on his encouraging Brian Lenihan to provide the guarantee contrary to the advice being provided by the civil servants and his assertion that the guarantee wouldn't cost us a cent."

He has said than he never thought that an open ended guarantee would be given, who would?

No one in his right senses gives an open ended guarantee, even if Lenihan had capped it at €25b we would have been a lot better off.
 
When house prices rise, demand should fall. But the opposite happens in Ireland.

In 2006 I coined Ghost Estates . I had been talking about the famine the night before. These are exactly the same. Breakfast roll man was building these estates.
There are two types of people who attend Aviva. Those who buy their own tickets. And those who have them bought for them. (Now a long winded story about Australian tries....)
 
Banks lend more because bankers get bonuses on the more than they lend

Banks go bust.

We have an issue of group think.

If you have ideas outside the mainstream , there are three stages

1)
2) violent opposition
3)And now, every one pretends they were on your side

[Chairman asks him for the second time to wrap up]

I wrote in 2007, I that banks usually go belly up.

[Third time the chairman wraps up]
 
Chairman: Did you ever think you might have been mistaken in your views on the house price bubble

No.

Did anyone every ask you your opinion

Most Irish economists are classical economists. I am not.

Explains how a bubble works. the different stages. ( Kindleberger silence
The banks are driving all this
5th stage is bubble
6th stage is stage distress
7th stage is panic
afterwards
1) minsky moment - banks realise that they don't have any money
2)
3) massive state intervention -

Not one person or minister asked me my opinion - no banker, no civil servant, no politicain,no minister

Please be succinct in your answers
Chairman: You talk about the Minsky moment
The design of the guarantee. Was that related to the bailout.
 
John Paul Phelan (Fine Gael)

You were on the radio in Sept 2008(?) with Brian Lenihan and Brendan Keenan

You got calls from bankers who accused you of causing panic. Who were they and what did they say. How many

I got two calls but not from senior people.

Off on a long story again.

JPP : What did they say?

McW: They told me my talk was dangerous.

JPP: You met Brian Lenihan that day ...

McW : We went on Saturday view - we talked about public service pay, but I told him that the problem was the banks. Irish banks risk going bust in the next couple of months
The minister said: That is dangerous talk
When telling the truth is dangerous, we are in the last resort saloon.
Brian Lenihan: You seem to know what is going on. Why don't you come in and advise me because everyone else is inadvising me.

JPP: on WEd 17th Sept you phoned the Minister...

McW: Everyone was saying: The banks were well capitalised, we have passed the stress tests
. It was on Joe Duffy, so it was real.

I went on Prime Time. lehmans had gone bust.

Chair: The deputy is asking you a question. Please answer it.

What was said in the phone call.

He said he would phone me back. He did and said he would call to visit me within the hour.

He called well after midnight. maybe 1.30 or 2

JPP: Were you preparing for him

McW. No.
Chair: Move to the substantitive part

McW: I have an article which I was sketching out that nigh

"The state must act as a safeguard"

I have had 1.2 m words published

JPP: Did you take a note of the meeting?
McW: It's here in the article which was publised on the Sunday

JPP: You say he was quite isolated from his officials.
McW: The most important thing is to know the facts. I asked him if he knew the facts. He said "no, I am getting differnt numbers from everyone
You have to do something temporary to give you time until you get the facts. "

I went through the options
We could let a bank go - that owuld not work
We could nationalise a bank - that would not work as the bank run was systemic
Merrill Lynch went bust and they were the advisors
option 3 - one of the big banks would buy a small bank. but I said that all the banks were bust. Two bad balance sheets doesnt' make a good one.
He asked what about giving depositors a €100k guarantee. I told him it could work, but you can't be a bit pregnat.
The limited guarantee was introduced the following friday and money continued to leave

I told him that there was one other option: The blanket guarantee

Blanket guarantees have been used in 14 out of 42 bank problems. I told him I don't know, but I think we are at the last resort.

You have to introduce a holding guarantee. I said you can't do something permanent if you are not in possession of the facts. You need to do something temporary with a time limit on it. I said in the article - let's say 2 years.

JPP: Did you include subordinate debt
McW: No. Subordinated debt is very interesting. - another long story... There is a distinction between debt and equity. Equity like instruments are never included. At no stage did I ever imagine that subordinated debt would be included. It's like equity. you are being paid more to hold subordinated debt
 
Pearse Doherty

I want to follow on from John Paul Phelan

The committee is gathering evidence. You are the only one who can give us the evidence on your interactions.

How many phone calls and meeting did you have.
It seems like 12 and 2 face to face.

McW: that is about right. It could have been 13 . Final meeting was on 4 October 2008. I never met him again. Intense discussion .

Pearse: Can you explain what a partial guarantee would be

McW: The minister was very professional. When he said a partial guarantee . The state would stand behind €50k or €100k. But I told him that the bank run was the billions of international money. They would see the partial guaranee as an indicator that there was a problem.

Doherty: His officals were deadset against a full guarantee:
McW: If you know the facts, you can be dead set against a guarantee. I said a ful lguarantee should be introduced only temporary. The officals said that the banking system
Doherty: Did the minster say to you that the officials were set against the guarantee
McWilliams: A partial guarantee was introduced but did not work
Doherty: Did you speak to any othe members of cabinet
McWilliams: one phone call from John Gormley. he asked me what was going on. I told him that he should tell me, because I was in China. It was a sounding board.
Doherty: Did you suggest to John Gormley a full guarantee.
McWilliams. No he said he would read what I wrote and ring me back. He didsn't.
Doherty: Did you and Gormley discuss nationalistion.
McWillimas: Yes. He asked if we could nationalise a small bank. I said we could but it would not stop the run. It would panic the others.
The IMF took this approach in Malaysia but it did not work.
We would achieve nothing and end up with a large bill

Doherty: You had a large amount of contact with the 2nd most powerful person in the state. Did he oppose nationalisation
McW: He was always discreet. always profession. He never told me what he was thinking. I felt sorry. It was a bit like promoting me to AG during a crisis.

Doherty: The governor told us that Irish Nationwide and Anglo should be nationalised there and then.
McWilliams: He never said that to me. He was always in listening mode.
Doherty: Why did he keep coming back to you?
McWilliams: I was at Davos in China, and he wanted to know what the foreigners were saying. That was the main purpose of his calls to me. I told him that they were not talking much about us.

You have a bank regulator who had not seen the biggest bank catastrophe.

Doherty: You say in your submissions to us that
In March 2009 you said that the guarantee should be rescinded. When did you arrive at that conclusion

McW: My idea was of a holding guarantee. Should that be 2 years or one year? If you give a 3 month guarantee, that would not be enough.

Doherty - but my question is - when did you form the opinion

McW: During October and Novermber - I wrote that I was worried about the inclusion of subordinate and small banks.

Doherty: How could it have been rescinded?

McWilliams: After 24 October - I was back on the outside. I assume that the Minsister was moving away from my thinking. I was worried that this was being used for full payment in the case of bankruptcy. After NAMA with the guarantee, it insisted that we would sell our assets at a dicount but pay a premium for our liabilties.

We could have rescinded the guarantee and left NAMA, and nothing would have happened.

Doherty: In Jan 2005(?) you wrote: a banker said that the top bankers must stay in place. The bankers suggested a type of war cabinet.

Mc Williams - tjat is what happened. The banks run the show and citizens get left behind.

Doherty: Why did the insiders ignore it if it was so obvious?

McWilliams; A small country with vested interests making lot of money, so they would vilify the maverick. My own profession was swanning around saying nothing.

Mantras replace hard thinking. It's hard to change your mind if you are a serious person (Galbraith) it's easier to look for the proof to show that you are right.
 
Last edited:
Chairman: Were the banks illiquid or insolvent. Please give a short answer

McWilliams- a rigmarole

Chairman: Please answer the question

McWilliams: They will become insolvent if they are illiquid

Chairman: You argued that they were not insolvent. I am still trying to establish your view.
McWilliams: If you did not give liquiditiy, they would go insolvent.
 
Joe Higgins

In 2001 you argued that cheap credit creates illusions of wealth. You refer to the Spanish conquest of South America. All this gold went to Spain. But Spain did not benefit economically.

Were the indigenous Irish people robbed by the equivalent of the Spanish aristocracy and the conquistadores?

McWilliams: Spain went from being the richest country in the 16th century to being the poorest in the 17th century. Because they stopped manufacturing. The Dutch and The Brits gained the most from the Spanish conquests.

Chairman - we need to move into the 20th century as we have only 3 minutes left.

McWilliams: The great building boom wealth favoured land and not small indigenous industry ( I am paraphrasing )

If you start with Pizarro you would run out of time...

Higgins: (Didn't catch the question)

Mc Williams: Never once was anything I ever wrote muzzled or interfered by an editor - never by the SBP, the Independent, TV3, RTE or Newstalk. There was not a corporate line.
 
Mark Mac Sharry:

Mc Williams: Have you ever played school boy soccer? A banger shows up on a team with a beard and scores 5 goals against you.

If a bank appears out of nowhere and starts to record extraordinary profits, it's a banger.

I would be hypersceptical of hypersuccess

Mac Sharry: It's a big issue that the regulator missed it

McWilliams: I had the balls to say it at the time. The Regulator should scare the daylights out of the banks.

Mac Sharry: What act should have alerted the politicians that the regulator was not doing his job?

McW: lots of ones

Mac Sharry: Were economists complicit in pushing the "let's party" agenda

McW: I wouldn't say that. But most economists missed it.

Mac Sharry: What is your behaviour of the media? Was there a herd mentality

McW: yes

MacSharry: EMU - Should Ireland have joined the euro?

McWilliams: Not at all. We trade with the UK and America. Our kids go on holidays to the English speaking word. EMU is a continental system and we are an atlantic race
 
Sean Barrett:
When were you in the CB? What section were you in?

McWilliams : The international division - I didn't catch the dates. - 1992 I think. I was always amazed the way that the people on the inside denied reality. They didn't see the queues of Toyota Corollas in Newry buying Harp. The Irish currency was overvalued. OUr bosses said that there was no crisis.

SEan Barrett: Did you ever meet the prudential regulators?

McWilliams: No

In 2000, I came up with a system which would regulate house prices. If prices rise, the amount which could be lent would be reduced.

Sweden had a problem in 1992. They guaranteed all deposits but not subordinated debts. They set up a bad bank quickly. They devalued their currency by 40%. But our currency revalued and our interest rates rose.
 
Michael McGrath

Autumn 2008. Was the decision to guarantee the banks the right decision?

McWilliams: Yes. It was the only decision.

It's in all my writings that it needs to be "let's say two years". Sufficiently long to sort out depositors but sufficiently long to [get at the bondholders?].

McGrath
You said all liabilities should be guaranteed
The day afterwards, you described it as a masterstroke
18 days later you were critical of the thinking.

McWilliams:
PwC were in the banks trying to find out. Unfortunately , the report said that they were ok.
When I saw subordinated debts , I was worried

McGrath: But you did say 100% of all creditors

McWilliams: But I excluded equities, and subordinate bonds are like equities. Clearly I did not mean them.
I expected that the guarantee should be more conditional.
Put in conditions to protect yourself.
Everything was calm - amazingly
Once you have the facts you can do something different

McGrath: Did you believe that the banks were insolvent?

McWilliams: the banks were definitely illiquid -

McGrath: With the benefit of hindsight - were the banks insolvent

McWilliams: Some were. Interestingly enough, they were all insolvent. Certainly the two smaller banks were insolvent. Anglo - obviously.
 
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