Honohan delivers inquiry options - but not solutions
I remember the first time I met Mike Aynsley, the chief executive sent in to clean up Anglo Irish Bank. It was 2009. The State had guaranteed the former bank turned piece of toxic radioactive waste, and Aynsley was doing a series of chats with journalists.
At the time the Government had put €4bn into Anglo and there was speculation that it could possibly need as much as another €5bn.
How naive we all were.
The straight-talking Australian acknowledged that many of the bank's property loans were, as he put it, "up the wazoo". I pressed him to see if he could confirm that Anglo would indeed need another €5bn. "It's a pretty big numba," was as much as he was willing to say in that Aussie accent. The figure ended up being close to another €25bn.
Not surprisingly, the wazoo wasn't mentioned at the Banking Inquiry during the week when Central Bank Governor Patrick Honohan gave evidence. But perhaps a blunt-talking Aynsley might have come in handy when it came to assessing what should have happened on the night of the bank guarantee.
Honohan wasn't being coy. It's that he is an academic, who doesn't relish speculation and "what ifs". He prefers to talk about things of which he is sure.
The easy assessment of the bank guarantee is that it was an obvious shambles that should never have happened. Honohan, a leading international authority on bank crashes, believes some form of guarantee was necessary, but not the one we got.
He believes junior bondholders should never have been included. Few would disagree with him about that. Under questioning from committee members, he said that greater consideration should have been given to liquidating Anglo Irish Bank that night and excluding it from any guarantee.
But Honohan goes on to say that liquidating it would have caused systemic risk. Ireland would have been pilloried even more in Europe for letting a bank go under and creating a "European Lehman Brothers". The country would have got a worse rap from Europe than it did with the guarantee.
So what should they have done?
Honohan doesn't actually say. He appears to say, and he admits this is with the benefit of hindsight, they could have gone ahead anyway, but he doesn't fully endorse that course of action.
He wasn't asked to outline who should have got wiped out in an Anglo liquidation. Obviously the shareholders and junior bondholders should have lost out. The big issue was should senior bondholders and depositors have been nailed also.
If depositers got rolled over, what impact would that have had on the other banks? Presumably, even the ones guaranteed by the State would have experienced a massive flight of money and the risk of a major run.
The blanket guarantee gave the impression of a government assuring Irish citizens and the rest of Europe, that everything was OK. This was just a crisis of confidence caused by liquidity problems abroad.
Honohan himself goes on to say that the regulators and the government didn't know enough about what was going on to make that assessment.
Even utilising the benefit of hindsight, Honohan could have used his appearance at the inquiry to outline what guarantee should have been introduced and what the consequences of that would have been.
Instead, he has fleshed out in a little more detail what he concluded in his report - but hasn't told us what he believes was the least-worst option.
Perhaps the most interesting revelation came in relation to a proposal to nationalise Anglo that night. He said that Brian Lenihan wanted to explore this option, but was over-ruled - presumably by Taoiseach Brian Cowen and possibly the attorney-general.
Another option would have been to provide Anglo with emergency funding to buy time to discuss other options with Eurozone colleagues. From the Anglo tapes, we know David Drumm wanted the Central Bank to provide the "moolah" months before.
Yet Honohan goes on to say that Europe would never have allowed us to burn senior bondholders in Anglo and therefore we could theoretically have saved just a few billion on the junior bondholders.
But Honohan doesn't say if this was what he would have done. There is a sense in which Honohan's thinking on the subject is influenced by the three hats he wears.
As an academic, he has a great grasp and encyclopaedic knowledge of what happened in banking crises elsewhere - what works and what doesn't.
As the head of the Irish Central Bank, he is diplomatic enough not to dump on the then Irish government and say what they did was a complete shambles.
As a board member of the ECB, he wants to suggest there were other alternatives to doing a guarantee solo run and keeping the ECB in the dark. Yet he isn't exactly spelling out in great detail which of them would have worked better.
One area where Honohan seemed quite comfortable being at odds with the current Minister for Finance was on the cost of the bank guarantee. We have put around €64bn into the banks.
Take away from that money received by the State from the guarantee, sale of shares in Bank of Ireland, the sale of Irish Life, and what we might get back from what is left, and he believes the end cost will be around €40bn. This could be €38bn or €42bn.
It is very hard to reconcile this figure with Michael Noonan's assessment that it would cost between €30bn to €35bn.
The difference between the two is anywhere between €3bn and €12bn. That is a pretty big gap. In truth, Honohan has let the cat out of the bag that nobody really has a clue how much we will end up getting from AIB and Permanent TSB.
Amid all of this stuff about hindsight and alternatives, a few things are becoming clear about the guarantee.
First, there was no easy way out of the mess and all alternatives would also have cost us dearly. They might have saved us some money, but not that much.
Second, the decisions on the night of the guarantee were made very much in the dark. Honohan outlined how the Central Bank didn't know enough about the banks' loan books.
John Moran of the Department of Finance recently said the Central Bank couldn't even give a moment-in-time detailed snapshot of the loan books across all of the banks until well after the troika arrived. They simply weren't geared up to do that.
Third, and most importantly, why was the course of action taken on the night of the guarantee the most favourable to the banks? Of all the things they could have done, the guarantee provided the best possible deal for failed institutions like Anglo and INBS. It kept Anglo shares trading. It kept INBS alive. It ensured a payout to all bondholders.
Brian Cowen's evidence should shed some light on whether he over-ruled Lenihan and if so, then why. He should also shed light on why they arrived at a decision that was the best possible outcome for Anglo.
Expect shorter, more direct sentences when Cowen arrives, but perhaps more heat than light.
Sunday Indo Business