DURING FOUR HOURS of evidence to the banking inquiry yesterday, Central Bank governor Patrick Honohan offered a unique insight into his conversations with Brian Lenihan before and after the September 2008 bank guarantee.
As we reported yesterday, the now deceased Lenihan was of the view that Anglo Irish Bank and Irish Nationwide should have been nationalised immediately after the bank guarantee was issued and that junior bondholders should have been burnt.
But Lenihan was overruled on the night and the rest is history, as we all know.
While this was the big story from yesterday’s evidence, Honohan also gave an interesting account of conversations he had with Lenihan both before and after the guarantee was issued.
Honohan was not appointed to the head up the Central Bank until September 2009 but around the time the guarantee was being considered he was professor of international financial economics and development at Trinity.
Under questioning from Sinn Féin’s Pearse Doherty yesterday, Honohan revealed a conversation with Lenihan in the summer of 2008:
“We talked about fiscal policy because the big topic was the adjustment of fiscal policy which was going wrong. We did not talk at all about the banks. It might have been earlier than August, say in June, but I could probably find the date,” Honohan said.
Doherty wanted to know if – given Honohan’s expertise – he was at all consulted by Lenihan or anyone in the Department of Finance in the lead-up to the guarantee.
Honohan shed light on another conversation he had with Lenihan’s officials in December 2008 when the future governor said he was “quite concerned”, particularly in relation to the decision to cover junior bondholders.
“At that stage I really did not have a concept that this was all going to end up as big in terms of tens of billions of euro. I thought it was going to be quite important how the Government handled the recapitalisation.
“I wondered if it put in €2 billion or €3 billion of capital whether that would make the subordinated debt holders get off free. So I wrote to the Minister, got a response from his office in December and I talked to some of the officials at that time.”
Honohan confirmed to Doherty that he never raised concerns about the Irish banking model with Lenihan and then recalled his next meeting with the finance minister around Christmas 2008 – after the guarantee:
“When I met him the next time, which must have been around Christmas 2008, he said: ‘Maybe I should have talked to you about banking’.
This prompted Doherty to say that perhaps the pair should have discussed banking in that summer 2008 meeting.
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