Brian Lenihan wanted to burn bondholders - but he was overruled

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Updated: 18.04

PATRICK HONOHAN, THE governor of the Central Bank, has told the Oireachtas banking inquiry that Anglo Irish Bank was a bank that Ireland “could have done without” and should have been allowed to fail.

Honohan told the committee that the country does well without Anglo now, but stated emphatically that when the bank guarantee was issued in September 2008 the now defunct bank was systemically important to the country’s financial system.

He also said that then-finance minister Brian Lenihan was of the view that Anglo and Irish Nationwide should have been nationalised and junior bondholders burned when the guarantee was issued in September 2008, but said  he was overruled.

Honohan did not specifically say who overruled the minister but noted he was “not the senior politician in the room”.

The governor told the committee that Anglo had run out of cash and should have been allowed to fail by the government in the September and October period of 2008.

“It should have intervened, management should have been removed, that would have been more clear if they had known what the size of the problem was,” he said.

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Honohan told TDs and Senators that Anglo’s business model was not seen as “credible in the market” and it had “run out of cash”.

He explained that the idea of the Central Bank giving Anglo emergency liquidity should have been considered to “buy a few days”. The governor said the bank could then have been liquidated on the weekend after the bank guarantee was issued.

Later Honohan said it was not his view in September 2008 that Anglo should have been allowed to fail and said it was with the benefit of hindsight.

€40 billion

Honohan said that the cost of the 2008 bank guarantee was in the region of €40 billion and argued that this could have been “whittled down” had there been discussion around burning bondholders.

He said that guaranteeing junior bondholders was “clearly a mistake”.

Of the political decisions taken on the night of the guarantee, the governor said they were understandable given the advice that was being given by officials.

“In the context of the advice they were being given the decisions they were taking were quite understandable.”

Lenihan

Honohan repeated his view to the committee that Lenihan wanted to nationalise Anglo and Irish Nationwide and also burn junior bondholders in September 2008 but said he was overruled.

The governor repeatedly declined to name who overruled the now deceased former minister, but said that Lenihan was not the senior politician in the room and noted:

“The Taoiseach and the Attorney General were present. They were the only other political people present.”

Honohan was making the first of what is expected to be two appearances before the inquiry that is expected to report in November

Today’s hearing focussed on Honohan’s May 2010 report into the causes of the crash entitled The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008. 

In his opening statement, he told the committee of 11 TDs and Senators that he saw no reason to alter the assessment of his report nearly five years ago and said that extensive changes have taken place in the Central Bank since the crash.

He said that his report identified that within government there was an “excessive reliance on regulatory philosophy that well-governed banks could be relied upon to remain safe and sound”.

He described the language of successive financial stability reports as “a triumph of hope over reality”.

Honohan also told the committee that greater consideration should have beeen given to liquidating the now defunct Anglo Irish Bank and Irish Nationwide in September 2008 instead of issuing a blanket guarantee.

THAT Morning Ireland interview

Asked about the Central Bank’s response to the economist Morgan Kelly, who predicted the crash in 2007, the governor said:

“The problem was that they did pay attention to him and they started to find ways of undermining the critique that he was accurately making.”

Fine Gael TD John-Paul Phelan attempted to raise Honohan’s infamous interview with Morning Ireland in November 2010 in which he confirmed for the first time that Ireland was applying for a bailout.

However, committee chairman Ciarán Lynch intervened saying committee members would have an opportunity to question Honohan on this when he appears before the inquiry again in the coming months.

“There’ll be no showboating here,” Lynch said.

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Will the ECB show up?

On the European Central Bank’s (ECB) refusal so far to attend the inquiry, Honohan said it did not want to put itself in a position where it is responsible to national parliaments as opposed to the European Parliament.

But he indicated there may be some form of cooperation from the Frankfurt-based bank with the inquiry. Lynch said that communication was ongoing with the ECB.

“There may be some possibilities that the information and the understanding of their position would be communicated in some way,” Honohan said.

He added : “I think the ECB does not want to disrespect in anyway this inquiry.”

Documents

In a statement released this evening, the committee confirmed it will be writing to the following institutions to seek documents and other material to assist its work:

• AIB (also covering EBS)
• Bank of Ireland
• Permanent TSB (also covering IL&P)
• Ulster Bank
• Special Liquidator IBRC (covering Anglo and INBS)
• Department of Finance
• Department of the Taoiseach

Lynch said that the committee previously wrote to these bodies in December seeking documents.

“Written submissions were received from the various institutions in early January and we are pleased with the co-operation we have received so far. The Committee is now formally directing the institutions to provide the information requested along with the sequence and timing as to when the material will arrive,” Lynch stated.

First published 10am

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