Former Taoiseach Brian Cowen directly overruled his Finance Minister Brian Lenihan about the scope of the disastrous €440bn blanket bank guarantee, the Oireachtas inquiry has heard.

Mr Lenihan was also prevented from moving immediately to nationalise Anglo Irish Bank and the Irish Nationwide Building Society.

Central Bank Governor Prof Patrick Honohan provided fresh insight into the key decisions made on the fateful night of September 29, 2008, which set Irish taxpayers on a path towards a €64bn bailout of the banks.

He told the Oireachtas Banking Inquiry that the decision to issue the guarantee was a “mistake”, but that Mr Lenihan’s preferred option would also have been flawed and costly.

Prof Honohan said the late Mr Lenihan had told him that he had argued strongly to limit the nature of the guarantee, and to not cover junior debt linked to the institutions.

However, he was overruled on the night in question.

Because of strict inquiry rules, Prof Honohan did not name Mr Cowen as having overruled Mr Lenihan.

But he did refer to the Taoiseach and Attorney General Paul Gallagher as being the “only other political people present” on the infamous night.

Prof Honohan said: “We’re not meant to talk about individuals but he (Mr Lenihan) was not the senior politician, and it was probably the weight of advice around him as well."

Mr Cowen did not respond to calls from the Irish Independent last night.

For his part, Mr Gallagher said he was precluded from commenting on Prof Honohan's testimony and said he was unsure if he would be appearing before the inquiry.

"I can't comment. My involvement in those matters is subject to professional confidentiality," he told the Irish Independent.

Prof Honohan made the admission under questioning from Fine Gael senator Michael D'Arcy.

The Governor said Ireland had gotten a "bad rap" for introducing the guarantee without any consultation with other European governments.

Pilloried

Prof Honohan said the State would have been viewed even more poorly internationally for saying "to hell with the bondholders" and liquidating Anglo, but this did not make it the wrong call.

"It would have been seen as the European Lehmans," he said, in reference to the US bank which collapsed in September 2008.

"The government would have been pilloried. That doesn't mean they shouldn't have done it, but they would have been pariahs in international circles."

In the first of two appearances before the inquiry, Prof Honohan said he understood Mr Lenihan thought that Anglo Irish Bank and Irish Nationwide should have been nationalised that night.

He said that Mr Lenihan ultimately backed down - in the expectation that the two would be nationalised by the end of the week.

Ultimately, the taxpayer has to date footed a €34.7bn bill in relation to both institutions which have since been wound up.

Prof Honohan concluded that Anglo Irish Bank should have been allowed to fail in September 2008.

Asked by Fianna Fáil's Michael McGrath if Anglo should have been allowed to go under at the time of the guarantee in September 2008, Prof Honohan replied: "Yes, certainly."

He said it should have been clear to the State's financial authorities that the bank was in danger of going bust.

He added that the bank was "clearly out of cash" and management of Anglo should have been removed.

"All the investment banks that looked at it saw that Anglo's business model was not credible in the market," he said.

"It had run out of cash and there was a big problem with its portfolio which would have eaten through its capital."

But he did point out that the European Central Bank (ECB) would have had major difficulties with allowing Anglo Irish to fail at that time.

He was asked by Fine Gael TD Kieran O'Donnell whether he felt Anglo was of systemic importance in 2008.

He replied that it was a bank Ireland could have done without, but at the time of the guarantee, it was of systemic importance.

He said the other banks were "close to the edge" at the time, and would have required Emergency Liquidity Assistance (ELA) if Anglo had been allowed to fail.

He noted however that this is now an academic point - as they ultimately needed to access ELA a few years later anyway.

Prof Honohan also said the decision to guarantee subordinated debt was "clearly a mistake".

"The formal guarantee, backed by legislation, of all long-dated debt was also unnecessary," he said.

He said the then regulator, Pat Neary, should have known Anglo was "bust" at the time of the guarantee.

Flawed

The Central Bank and Financial Regulator appeared to be in the back seat when many of the decisions were taken in 2008, he said.

He added that given how flawed the advice was, he had "great sympathy" for those who made the decision on the night, saying the course of action followed was "understandable".

Prof Honohan agreed with a suggestion by TD Joe Higgins that the "property bubble had been blown to extremes by the scramble by the banks for super profits".

"That's right," he said.

The bank guarantee did not protect poor people relative to the rich - but it was an attempt to stabilise the economy and it could have reduced the adverse effects he said.

Prof Honohan did not dispute that the poor had suffered more than the rich. "This has been very bad for the poor, definitely it has been very bad."

The inquiry last night moved to formally seek documents from a number of the bailed-out banks as well as the Department of Finance and the Department of the Taoiseach.

Inquiry Chairman, Labour TD Ciaran Lynch said: "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."

Irish Independent