Rule of Law.
In 2008, during the Slovenian Presidency of the European Union, I accompanied Brian on a trip to Ljubljana for a Council of Ministers’ meeting in the area of Justice and Home Affairs. At the meeting, he was fully in command of his brief and was clearly highly respected by his European colleagues. My abiding memory of the trip, however, related not to the official business, but to Brian’s deep interest in a little known Irish saint, St. Coloman of Stockerau, who as an Irish pilgrim travelling to the Holy Land was tortured and hanged near Vienna on suspicion of being a spy. St. Coloman had travelled through Slovenia on his journey to the Holy Land. Brian, being deeply interested in history and all things Irish, was interested in learning more about St. Coloman’s connection with Slovenia, despite the fact that, at best, St. Coloman was one of history’s footnotes. I was struck by Brian’s effortless knowledge of this little known saint and his quite extraordinary hunger for more knowledge about him. This, of course, was very characteristic of Brian. There was no subject, however, arcane or esoteric, in which he was not interested and very few matters about which he did not display a very impressive This ability to store and assimilate information was to stand him in good stead in the forthcoming challenges of which he was then blissfully unaware. knowledge, not only of the general subject matter, but of the detail.
Brian had great enthusiasm for all aspects of his Justice brief and displayed the surefootedness and insight of a longstanding and very experienced minister. A life in politics had prepared him well. These were qualities that were very apparent to his colleagues. Taoiseach Brian Cowen made an inspired decision in choosing Brian as his Minister for Finance in May 2008. It was in this latter office that Brian will be long remembered. Much has been said about Brian in that role. Much has been made of Brian’s ministerial inexperience, his lack of any qualifications in finance or economics and of the fact that he had little time to prepare for the financial maelstrom, which hit the financial systems of Europe and the United States in late summer 2008.
Those comments are usually stated by way of an implied criticism, but, in my view, they miss the point. It is true that Brian had been a Minister for less than a year when he was appointed Minister for Finance, but few elected representatives ever had such a profound and instinctive knowledge of the operations of government and of parliamentary democracy. Brian had been acquiring political knowledge all his life, having grown up in a deeply political environment. It is also true that Brian had no formal qualifications in finance or economics, but very few Ministers of Finance in Ireland or, indeed, elsewhere have had such qualifications. He had other qualities which were of equal if not greater importance. He had the ability to rapidly absorb complex information and to apply it to the practical reality confronting him. He also had the confidence and judgment to make decisions. He knew when to listen and when to act. He canvassed many opinions from many different people. These served not to impede his decision-making process, but contributed to it. He readily segregated good and bad advice and was not afraid to reject advice from any quarter if, after consideration, he did not agree with it. He was open to ideas and to suggestions, but never feared having to make a decision and to take responsibility for it. From time to time, I have heard commentators suggest that Brian may not have had an understanding of technical details. I do not agree. There were, undoubtedly, many things he had to learn. He, undoubtedly, made mistakes. He did, however, possess the capacity to master technical information and issues confidently and quickly and, when he needed to make important decisions, he ensured that he had a thorough understanding of the technical complexities.
In order to understand the context and, more particularly, what Brian and the Government faced in September 2008, it is necessary to describe briefly some of the international events which brought much of the western world’s financial system to the brink of destruction. It must be remembered that Ireland initially faced this crisis entirely on its own and without the financial or economic resources enjoyed by the large states and without the monetary tools necessary for this purpose. Ireland was a member of the Economic and Monetary Union, (EMU), but it retained sovereignty and responsibility in respect of its own financial system. Under the then European Treaties,3 the European Central Bank (the ECB) was responsible for monetary policy, but it not only had no responsibility for intervening to prevent the collapse of a Euro member’s financial system, but was expressly prohibited by law from doing so.4 In fact, as Governor Mario Draghi was later to demonstrate, the ECB could have done much more than it did in those early critical months. Jacques Delors, one of the Euro’s chief architects, in a speech in Brussels on 28 March 2012, criticised the ECB’s approach at that time. When Governor Draghi took over the ECB he reversed the interest rates increases in November/December 2011 and expanded the pre-existing longer term refinancing operations (LTRO), which permitted banks to borrow large amounts of money from the ECB for terms as long as three years and demonstrated that much could be done by the ECB within its legal constraints.
Many would say that the financial crisis, which led to what is now known as the ‘Great Recession,’ began in 2007 in the US with the collapse of the sub-prime mortgage market.5 The problems in financial markets gathered pace in 2008. In March 2008, the US Federal Reserve, supported by the Treasury, contributed almost $30 billion to facilitate the takeover of Bear Stearns by JP Morgan. International financial markets were getting very uneasy. However, there was still great optimism with regard to the future and little sense of the impending calamity. Governor Jean-Claude Trichet, in June 2008, at a ceremony in Frankfurt’s Opera House to celebrate the tenth anniversary of the ECB, hailed the Euro as a ‘remarkable success’ and stated that he had no wish to name and shame those who predicted it would fail.6 However, unlike other Central Banks, such as the US Federal Reserve Bank and the Bank of England, the ECB could not act to regulate liquidity and interest rates in capital markets by making large-scale purchase of government bonds. Under the then interpretation of its mandate and powers, it in effect was an interested but powerless bystander. As mentioned above, the ECB’s legal mandate to address the dramatic events of September 2008, which triggered, certainly in this country, a financial and economic crisis of unprecedented proportions, was limited. The ECB did, of course, have power to cut interest rates, but it refused to do so until October 2008. The 4 per cent overnight rate that prevailed in August 2007 did not fall to 3.25 per cent until November 2008 and did not get as low as 2 per cent until January 2009. By contrast, the Federal Reserve was virtually 0 per cent by December 2008. This situation undoubtedly made it more difficult, particularly for a small country like Ireland, to address the problems created by the financial crisis.
On 16 September 2008, the US Federal Reserve had to extend a loan of $85 billion to AIG, the American insurance giant to save it from collapse. Morgan Stanley was also in trouble. It borrowed heavily from the Primary Dealer Credit Facility set up by the Federal Reserve’s Board of Governors to lend money to securities firms by broadening the range of eligible collateral. Morgan Stanley and Goldman Sachs applied to the Federal Reserve to become banks in order to obtain the protection which was available to banks. Merrill Lynch was about to collapse and was sold to Bank of America in order to save it. Washington Mutual, the nation’s largest savings and loan association and the sixth largest bank of any kind, failed on 25 September 2008. All this followed the collapse of Lehman Brothers on 15 September 2008.
Around the same time in Germany, Hypo Real Estate Bank had to be supported with a €35 billion credit arranged by the German Finance Ministry because of a liquidity run. The proposed deal fell apart on 6 October 2008 and the Bundesbank had to arrange a new line of credit, this time for €50 billion and subsequently the bank was nationalised in 2009.
Following the collapse of Washington Mutual in the United States, there was a silent run on Wachovia, the US’s fourth largest bank (it was twice the size of Washington Mutual). The market value of Wachovia’s ten-year bonds dropped from 73 cents in the Dollar to 29 cents. In effect, the bonds of America’s fourth largest bank were then junk bonds. Wells Fargo stepped in on 3 October 2008 under government pressure to save Wachovia and, on the same day, the US Congress passed a modified version of the Troubled Assets Relief Programme (‘TARP’).7
On 25 September 2008, rumours circulated that Fortis, a gigantic banking insurance investment conglomerate, based in the Benelux countries, was in difficulty. The Belgian, Luxembourg and Netherlands Governments offered support to Fortis. They announced that the banking division would be nationalised,