I entirely agree with the assessment that Clinton was simply not going to lose in 1996. That being said, I think Powell would have been the strongest candidate, even more so than McCain or Thompson. The first reason is that McCain has a habit of making unfortunate gaffes. He's a passionate guy, a trait that can be both beneficial and problematic. That was made clear in 2000 and 2008. The second problem that McCain has is that he hasn't made a name for himself yet. His maverick record was already established, as were his credential on foreign relations. But he needed more time to move up the ranks, and was better suited as a Vice-Presidential candidate than as the top dog on the ticket.
The problems with Thompson have less to do with his record as Governor and more to do with his personality. When he ran in 2008, he wasn't able to inspire anybody. Clinton, on the other hand, is incredibly inspirational and moving. The contrast would be too great. Thompson has a great deal in common with Dole. Both had a strong resume as policy leaders, but both failed in being able to move voters on the national level.
Powell is really the best of both men. His record in the military speaks for itself. He served on the ground in Vietnam, and was badly wounded. But he also served as a troop commander, an area where leadership counts the most. His record in government as an adviser to Presidents Reagan and Bush is also particularly strong. I can personally attest that he is a charismatic, powerful, and surprisingly funny public speaker. He would be able to draw some Reagan Democrats into the fold with his background and views on many issues. His foreign policy views are also quite appealing. The line that has often been attributed to him (despite his claims that he never said it) is "you break it you buy it." That would be an excellent go-to in regard to Somalia. His views are neo-realist, providing a strong counter punch to Clinton's neo-liberalism. He would be a well-rounded candidate who would push Clinton to the very end, though I agree that Powell would still probably lose.
There's a vignette that Powell often says at the end of his motivational speeches. It's about the greatness of America. He talks about walking down the street in New York and getting a hot dog from an immigrant vendor. The gist of the story is that people come to America because it's a great nation, and sell one of the most American foods once they're here. I don't remember all the details of the speech, but it was quite moving. It's the sort of ending to a stump speech that is perfect for a Presidential campaign, and one that symbolizes why Powell would be such a strong nominee.