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Home > Blogs > Ian Fraser > How a deceptive report from Merrill Lynch sank Ireland

How a deceptive report from Merrill Lynch sank Ireland

Irish economy | How a deceptive report from Merrill Lynch sank Ireland Ian Fraser

Michael Lewis, author of The Big Short: Inside the Doomsday Machine and Liar's Poker, has invented a new journalistic genre. It’s called “financial disaster travel journalism” and involves Lewis visiting various economically bombed-out European countries and doing an old-fashioned thing that many journalists have forgotten about - reporting.

The first three installments, “Wall Street on the Tundra” (April 2009), “Beware of Greeks Bearing Bonds” (October 2010) and “When Irish Eyes Are Crying” (March 2011), all published in Vanity Fair, are essential reading for anyone interested in the unfolding financial crisis and how different European countries are coping with national bankruptcy. They are also among the best pieces of financial journalism I’ve read.

In the most recent installment, a 13,348 word epic on the former ‘Celtic Tiger’, Lewis delineates the causes and fallout of Ireland's crisis. He singles out the Irish government’s decision to offer a blanket guarantee to all depositors and bondholders in Irish banks -- inspired by a rose-tinted account of their financial strength from investment bank Merrill Lynch -- as one of the worst ever taken by a national government.

The decision is what necessitated last November's humiliating IMF/EU bailout, which in turn has condemned Ireland’s 4.4 million population to many years of debt servitude.

Lewis puts the boot into Ireland's finance minister Brian Lenihan, holding him ultimately responsible for the decision. Interviewing Lenihan in the finance department’s conference room in Dublin's Upper Merrion Street, Lewis suggests that Lenihan remains firmly ‘in denial’ about how deranged the Irish people became during their own hyper-inflated property bubble - and about how abnormal life on the Emerald Isle has become after it so spectacularly burst.

Lewis describes the myriad half-built office blocks on the banks of the Liffey, which flows through central Dublin, and the “empty Starbucks in the heart of what was supposed to be a global financial center to rival London’s, where “a carton of low-fat milk curdles beside a silver barista pitcher.” Then, having earlier reported Lenihan’s insistance that there isn’t really much of interest to report on in Ireland, Lewis remarks:

"The finance minister might as well be standing in Pompeii and saying that actually the volcano wasn’t really worth mentioning. Just a little lava!"

Lewis lambasts the Irish government, and Lenihan in particular, for the September 2008 decision to provide 100% guarantees to both depositors and bondholders in Irish banks, and ridicules its decision to place its faith in advice from US-based investment bank Merrill Lynch:

"Some might say that if you were asking Merrill Lynch for financial advice in 2008 you were already beyond hope..."

In one of “Irish Eyes”'s more remarkable passages, Lewis describes how Merrill Lynch had earlier suppressed the truth about the state of the country’s property and banking market. He describes how on March 13 2008, Merrill Lynch analyst Philip Ingram issued a research note that lifted the lid on Irish banks’ reckless lending against a Ponzi-like commercial property market.

But Lewis points out that Merrill Lynch chose to suppress the note following pressure from furious Irish banks, some of which were customers of Merrill Lynch.

Ingram was fired a few months later. This sort of thing makes plain why "bulge bracket" investment banks are not to be trusted. They are seeking to profit from so many corners of the financial markets, and they are so heavily conflicted that they are basically incapable of providing objective, useful information and advice to their clients (or "counterparties"). The affair prompted the US financial commentator Barry Ritholtz to write this coruscating piece on his Big Picture blog:

"Cowards. Criminal toadies. Chickenshit pimps who would sell their mothers into forced prostitution for a buck. That is Merrill Lynch, and the fact that a single goddamned dollar of my tax money went to these spineless, money-grubbing parasites makes my stomach turn."

Just to recap, Merrill Lynch knew that trouble was brewing for the Irish banking market in March 2008 (given Ingram's suppressed note). But six months later, when the situation was even worse, it didn't see fit to hoist any red flags to the Irish government. As Lewis tell us,

"In the seven-page memo to Brian Lenihan—for which the Irish taxpayer forked over to Merrill Lynch €7 million—they kept whatever reservations they may have had to themselves. "All of the Irish banks are profitable and well capitalised,” wrote the Merrill Lynch adviser..."

It was on the basis of Merrill Lynch's seven page report -- which came in at a cool €1 million a page -- that Lenihan and the Irish government chose to offer 100% blanket guarantees to all depositors and bondholders in Anglo Irish Bank, Allied Irish Banks and Bank of Ireland. And we all know how much that cost them.

With the risk of a massive run on Ireland’s banks bringing Ireland's over-extended banking system crashing around his ears, Lenihan faced a difficult choice, writes Lewis:

"Should he believe the people immediately around him or the financial markets? Should he trust the family or the experts? He stuck with the family. Ireland gave its promise. And the promise sank Ireland.

"[...]In retrospect, now that the Irish bank losses are known to be world-historically huge, the decision to cover them appears not merely odd but suicidal.

"[...]A single decision sank Ireland, but when I ask Lenihan about it he becomes impatient, as if it isn’t a fit topic for conversation. It wasn’t much of a decision, he says, as he had no choice.

To me, it's astonishing Lenihan doesn't even want to discuss the possibility he was given poor quality information by Merrill Lynch. After all, don't most politicians like to pass the buck whenever possible?

Further reading on the Irish economy and the crisis:

Tags: banks , EU , financial crisis , Financial Services Authority (FSA) , IMF , Ireland
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