Merrill Lynch & Co. told the Irish government in 2008 it would cost 16.4 billion euros ($22.8 billion) at most to rescue its banks, a quarter of the eventual bill for bailing out its financial system.
Merrill produced the estimate in a 45-page presentation to the Dublin-based Irish finance ministry on Nov. 18, 2008, according to documents released by the government after a freedom-of-information request by opposition lawmaker Pearse Doherty. Ireland paid the firm 7.3 million euros for banking advice in 2008 and 2009.
Since the estimate, Irish taxpayers have been forced to pledge about 64 billion euros to rescue the nation’s banks after the worst real estate crash in Western Europe. In November 2010, the country sought an international bailout as it struggled with the mounting cost of propping up the banks.
“Merrill Lynch completely underestimated the capital shortfalls within the banks, but the whole exercise was rushed after the guarantee,” Doherty, finance spokesman for Sinn Fein, said in an interview. “The role of external advisers, including bank auditors, really needs to be looked at as part of the banking inquiry.”
Prime Minister Enda Kenny’s administration, which came to power in March 2011, is preparing to hold a parliamentary committee inquiry into the banking crisis.
Ireland’s then government hired Merrill Lynch to advise on options for its floundering lenders in September 2008 before introducing a guarantee of most of its banks’ liabilities, totaling about 440 billion euros.
Victoria Garrod, a spokeswoman for Bank of America Corp., declined to comment. The Charlotte, North Carolina-based bank agreed to buy Merrill in September 2008, two months before its advice to the Irish government. The state’s contract with Merrill ended in June 2009, the Irish public spending watchdog’s office said in April 2010.
In the November 2008 presentation, Merrill estimated the recapitalization costs at between 6.5 billion euros and 16.4 billion euros. The firm weighed a series of merger options between Irish lenders as well as the creation of a nationalized bank to wind down toxic commercial real estate loans.
The government, led by then Prime Minister Brian Cowen, decided to set up a bad bank, known as the National Asset Management Agency, in April 2009. Banks lost about 40 billion euros transferring risky loans to NAMA. Further bad loan losses were uncovered during two central bank stress tests in 2010 and 2011.
Merrill estimated now-defunct Anglo Irish Bank Corp. Plc would cost 5.63 billion euros to rescue, a fifth of its final cost. It assumed Allied Irish Banks Plc, the nation’s second largest lender, would need 5.62 billion euros. Within three years, the state had injected almost 21 billion euros into the bank, in which it now has a 99.8 percent stake.
The investment bank’s 4 billion-euro Bank of Ireland projection was near to its 4.8 billion-euro taxpayer rescue, which has since been recouped by the government.
Merrill’s advice was based on increasing banks’ core Tier 1 capital ratio, measure of financial strength, to 8.5 percent. Ireland’s bailout troika demanded in 2010 that enough capital be injected into the lenders to ensure the measure remained above 10.5 percent.
Allied Irish Bank Plc’s ratio stood at 15 percent on Dec. 31, while Bank of Ireland Plc had a ratio of 12.2 percent.
In addition to the state’s injection of capital, junior bank bondholders lost about 15 billion euros and private investors bought 3.1 billion euros of shares saving the financial system.