Legislation to nationalise Anglo Irish Bank and Irish Nationwide was ready to be used on the night of the bank guarantee, the banking inquiry has been told.

Former secretary general of the Department of Finance David Doyle confirmed the then attorney general had a draft piece of legislation prepared ahead of the meeting in Government Buildings in September 2008.

Mr Doyle confirmed former minister for finance Brian Lenihan and Kevin Cardiff, who at the time was in charge of the banking unit in the department, preferred that route over a blanket guarantee.

“The reservations about that approach were that it could undermine the guarantee and call into question the need for further nationalisations,” he said. “When he listened to the reservations about what nationalising could have for credibility of the guarantee he changed his mind, he accepted that.”

Mr Doyle said there was a debate through the night about the possible nationalisation. He said the main concern was that this would be “tantamount to a failure and indicative of greater dangers”.

Bank guarantee

The former secretary general, who was head of the department from 2006-2010, said former taoiseach

Brian Cowen

had put the concept of a broad bank guarantee on the table “early on” in the meeting.

He said during the night Mr Cowen and Mr Lenihan had a meeting and when they returned, officials were informed the cabinet would be asked to approve a guarantee.

Mr Doyle said Mr Cowen was in charge on the night in question but had allowed for hours of debate on alternatives. He said he could not say whether Mr Lenihan was overruled by Mr Cowen.

He said the Government was put in an “impossible position” and action had to be taken. The broad guarantee to all banks, he said, was the “least worst option”.

“On that night, money was running out. There was a fear Anglo wouldn’t open in the morning and banks would be disastrously affected. There would have been economic chaos,” he said.

“There wasn’t time to get a root-and-branch review of the true financial position of the banks. We were relying on the [financial] regulator presenting his view.”

Solvent

The financial regulator had continued to assure the government on the night that all banks were solvent, Mr Doyle said.

“In the case of Anglo, they had run out of liquidity and the bank that runs out of liquidity is on borrowed time. It has to meet its obligations,” he said.

“It became known very fast that the cash available would disappear. People would have started pulling out funds. Illiquid banks become insolvent banks. I definitely felt that if their lack of liquidity continued, it would rapidly become insolvent.”

Fianna Fáil TD Michael McGrath asked Mr Doyle about the evidence given to the inquiry by former European Central Bank president Jean-Claude Trichet, who said he never directed Mr Lenihan to act in a certain way and only offered advice.

Mr McGrath asked whether Mr Trichet had reported what had happened accurately.

Mr Doyle said the view of Mr Trichet and the ECB had been quoted to the meeting by the then governor of the Irish Central Bank John Hurley.

“Mr Trichet had advised him that no bank failure could be allowed, or words to that effect.”

The former official criticised the actions of his department in the run-up to the crisis and admitted its fiscal policy should have been more conservative. He said it was a mistake to take the advice and assessments of various state organisations including the Central Bank, the regulator and the banks.