Michael Lewis Takes on Merrill and Its 'Advice' to Ireland

The Irish Independent reported today on Merrill Lynch and its 'advice' to Ireland to guarantee all of its banks' liabilities.

MERRILL Lynch was pivotal in the disastrous decision byIreland's Finance Minister to guarantee its banks' debt, according to an expose of the financial crisis to be published this week.

The expose was written by Michael Lewis.  In it, he argues that the Irish public should not take on the losses of the banks.

The American investment bank, which underwrote Irish bonds, scotched a report by one analyst because it contained negative comments on the country's banks, according to the report in Vanity Fair.

Merrill retracted and then toned down the research note by Philip Ingram, which caused a sensation on the London markets when it was published in March 2008.

The bank also submitted a seven-page memo to Brian Lenihan and his Department of Finance, for €7m, in which it implied that a sensible option would be to guarantee the debts. In the memo, Merrill's investment bankers wrote that: "All of the Irish banks are profitable and well capitalised."

But the Vanity Fair article, due on Friday, claims: "It would have been difficult for Merrill Lynch's investment bankers not to know, at some level, that in a reckless market the Irish banks had acted with a recklessness all their own."

To prevent this type of situation ever happening again in any country with regards to its banking systems, this blog has repeatedly called for banks to disclose their current asset-level data on an observable event basis.  This data would give all market participants the useful and relevant information they need to analyze the situation (see here and here).

If current asset-level data had been available, it is highly likely that the Irish banks would not have taken on the risk they took on.  Credit and equity market analysts would have seen the risk, the pricing of debt would have increased and the value of the banks' stock fallen dramatically before the problems became severe.  This increase in the cost of doing business would have been a strong signal from the financial markets to cut back on risk.

Ireland was forced into an euros €85bn European bailout in November after its banks were threatened with collapse following catastrophic property lending. The country had denied for months that it had a problem. The article is written by Michael Lewis, a former bond trader who described his experiences working at Salomon Brothers in a bestselling book Liar's Poker.

© The Times, London

Mr Lewis writes that Merrill fired Mr Ingram at the end of 2008 and that one of his colleagues, Ed Allchin, was "made to apologise to Merrill's investment bankers individually for the trouble he'd caused them by suggesting there was still money to be made on shorting Irish banks".

Merrill, now owned by Bank of America, did not return several calls seeking comment.