Lenihan 'suspicious' of the banks, adviser tells inquiry
The late Brian Lenihan was "suspicious" of the banks and could not determine if they were deliberately misleading him or just inept, the Banking Inquiry has been told.
Cathy Herbert, former special adviser to the finance minister, said he found it "very difficult" dealing with the banks. "Yes, he was suspicious, yes."
She told Deputy Kieran O'Donnell: It was difficult for him to know ... at times, whether he was being misled or whether it was just ineptitude."
Ms Herbert said her former boss was concerned that the bank guarantee of September 29, 2008 would not be enough.
Mr Lenihan was conscious of the importance of the decision and the liabilities. Very soon afterwards, she added, he was sceptical of the extent of the exposure of the banks.
"My recollection is that he was worried about whether or not the decision they had taken would be enough to stabilise the banks."
The advice to the government on the night was that the banks were fundamentally sound and well-placed to ride out what was expected to be a modest correction.
She described the recapitalisation of the banks as "the running sore of the crisis" where every step of progress was "swallowed up by another gaping hole in the banks".
She also did not believe Mr Lenihan had been "over-ruled" by Taoiseach Brian Cowen on the night of the guarantee.
While there was no doubt Mr Lenihan was strongly in favour of the nationalisation of Anglo Irish Bank, once the decision was made to include it in the guarantee, she said he would stand by that decision.
Mr Lenihan would have known that once a decision was made "it was his job to go out and defend that decision and execute that decision".
The European Central Bank "wanted us to find our own way of addressing our banking difficulties. The guiding principle was that no bank should be allowed to fail."
Ms Herbert said her former boss had fought to keep the country out of a bailout and was anxious to see if a precautionary bailout could be secured using a four-year plan.
Individual countries at the time had pushed for a hike in corporation tax, but this was a red line issue for Mr Lenihan.
The former minister had been taken by surprise and irritated by Central Bank governor Patrick Honohan's call to 'Morning Ireland' announcing he expected a bailout. "It made for a difficult day," said Ms Herbert. The government had hoped to keep their powder dry for negotiations.
But he had said to her afterwards: "You know the governor had his own pressures."
Ms Herbert said the minister did not ask her to play any role in the formulation of banking policy. Later it was clear that many government advisers "were hampered in their analysis of the crisis by their unswerving belief that our banks were fundamentally sound".
They were also hampered by "their failure to consider the possibility that their might be a crash rather than a soft landing in the Irish property market".
"Each course of action opened up its own Pandora's box creating another set of problems that had to be managed," she said.
Towards the end of his life Mr Lenihan felt that the bank guarantee was the best decision that could have been made at the time. Ms Herbert said Mr Lenihan would have "relished" the opportunity to give his account to the inquiry and "it's a great pity that he's not here to be able to give you those details".