Brian Lenihan 'wanted to give a shot' to proposal to save Anglo-Irish Bank
Former finance minister Brian Lenihan asked Europe to rubber-stamp plans to save Anglo Irish Bank, his former special advisor has said.
Alan Ahearne, Mr Lenihan's right-hand man at the height of the financial crisis, said his ex-boss was "open-minded" about a plea from Anglo chiefs to give the lender a makeover rather than shut it down.
Bosses at the now defunct bank, which helped bring Ireland to its knees during the crash, wanted to carve out a new small business bank from the remains of its catastrophic collapse.
Mr Ahearne told the Oireachtas Banking Inquiry that the late Mr Lenihan wanted to "give this proposal a shot", which would have seen Anglo renamed and rebranded in 2010 as An Banc Nua, or The New Bank.
"The proposal to carve out a small business bank came from management," Mr Ahearne, a professor of economics at the National University of Ireland, Galway told the hearings.
"The minister felt that the argument was put to him that this carved out a small, new business bank, it might be worth something, and therefore it might save the State a few billion, in terms of the net costs of the banking system.
"That obviously got his attention."
Mr Lenihan was also convinced that more competition in an overhauled Irish banking system would be helpful, said Mr Ahearne.
"Any interactions I had with him, he was open-minded on it, but I never remember him being convinced one way or the other, so he wanted to give this proposal a shot," he said.
"It was being sent over to the European Commission for approval and back, I was seeing all this documentation.
"I think what happened as we got into August and September is the European Commission had gone very cold on this plan and the minister felt it just wasn't going to work."
Mr Ahearne said he was sceptical at the time that Anglo could be rehabilitated because its "expertise" was in large lending to the commercial property developers, rather than small businesses.
Mr Lenihan was also in favour of burning senior bondholders - forcing top-level investors in Irish banks, like institutions, to share the losses of the crash in banking stocks, his former special advisor said.
The pair had "many discussions" about the possibility of "haircuts" - enforced cuts to the value of investments - during the summer of 2010 ahead of the blanket bank guarantee coming to an end that September, he told the inquiry.
"I remember a conversation where (Mr Lenihan) begun with the line: 'The bondholders are going to have to take a haircut'," he said.
Mr Ahearne said the former finance minister spoke about Anglo bondholders being forced to take a 50% cut, Allied Irish Bank investors 20%, and as little as 5% for Bank of Ireland bondholders.
Mr Lenihan thought it was, in principle, a good idea, he said.
However, in the event the European Central Bank, backed by the European Commission, warned Mr Lenihan that Ireland would not get a bailout if he pressed ahead with burning bondholders, Mr Ahearne said.
While officials within the International Monetary Fund were in favour of such a move, the organisation "at executive level" also blocked the proposals, he added.