Buiter on nationalisation

Willem Buiter has a thought-provoking piece arguing for full nationalisation of all banks here. What do those of you who understand banking think about his arguments in (a) the British context, and (b) the Irish one?

13 replies on “Buiter on nationalisation”

very cogent as one might expect. however, the fatal flaw, in the irish context at least, is that it ignores the politics of the situation. For example “Although publicly owned, the banks would be mandated to operate on ordinary commercial principles. Managers could be incentivised by linking remuneration to multi-year profitability.” But, we have already heard cries for lower and more punative remuneration.
Can we trust that state run banks, in this context, would work commercially and not be subject to political interference ? I for one cannot trust that would happen. Maybe in the UK they can trust their political system not to loot, but can we ?

I wonder how do you justify the salary of the CEO of the Educational Building Society being twice that of the Secretary General of Dept of Finance?

There is also a wider question as to what type of banks we require. Do you we want banks which do the boring traditional banking work and service their customers requirements, or ones who take massive risks to maximise profits. Had McCreevey & Aherne not sold of the TSB & ICC to fund short-term tax cuts to fuel the bubble, we would be in a very different position. There would be at least some structures in place to pick up the pieces.

There are a variety of regional banks, such as the Basque savings bank BBK http://www.bbk.es, which offer alternative structures of control, rather than direct State holding and possible day to day interference.

Seeing profitability alone, whether multi year or not as the basic way of remunerating people. Banking is at its most basic a utility like a road. It is a method of moving money. Perhaps the managers should be paid the same as bus drivers!

Buiter wrote a piece in October (link below) outlining the dangers of state ownership of banks (politically directed lending, political micromanagement of the bank, jobs for the boys, etc.). That piece is worth reading again given developments here on Thursday evening. This tension between government control and market forces highlights a key policy issue for many countries: Whatever needs to be done in the immediate crisis, what is the best way to get governments out of the banking sector when the crisis has passed?


I have to disagree with my former macroeconomics teacher on this one. The reality is that Ireland, the UK and USA are ‘over-banked’ – too many bankers chasing too few savers/borrowers. One reason why they gave up the boring utility stuff to play in the casino these past few years (to use John Kay’s apt analogy http://tinyurl.com/8a7uxh).

Just as global car production exceeds global demand (and has for some time), the coming cull of car makers is a precursor to a cull of bankers. The problem with nationalising banks (as with nationalising car makers) is that no Government is going to preside over the shrinking of an entire sector of the economy – if they can avoid it. And major redundancies in the financial services sector are what we’re going to get.

With nationalisation we end up with the worst of both worlds: owning the problem and preventing the solution. Better either to use Anglo as a toxic warehouse for other banks’ bad debts, and/or for the Government to ‘insure’ the banks’ unpriceable assets, as in yesterday’s Fed/Bank of America initiative.

Gerard, This idea of using “use Anglo as a toxic warehouse for other banks’ bad debts” is being bandied about in the media. I have at least two problems with this. First, you can’t use an operating bank as an management vehicle for distressed assets. Now maybe the Government will set up such a vehicle to buy impaired loans from all Irish banks, but it will not be a bank. Or maybe Anglo is put into liquidation and its bad loans are put into an asset management company, and that AMC will also buy bad loans from other banks. But that AMC will not be Anglo Irish Bank. Anglo’s good loans and all its liabilities will be somewhere else.
Second, the AMC (let’s call it the Irish Bank Restructuring Agency) should not be a “warehouse.” Quite the opposite. It should actively restructure and sell off the distressed loans to recover as much money as possible for the taxpayer.

Wonder if it can be a bank in this state?. Dont know the law well enough. I think also that nobody is suggesting that the toxins get dumped into the whatever and left there. All comments are “quarantine and work through” comments.
Does anybody know if we need a seperate structure or can we use a existing entity….?

I take your point Alan – especially about the ‘warehouse’ idea. On balance I lean more towards the BoA insurance model than the ‘all bad eggs in one basket’ concept. John Redwood points to one problem with the latter: as the recession deepens the number of impaired loans will keep growing anyway: http://tinyurl.com/8u736z

But if we do have to go the AMC route then maybe there’s something in Stephen Kinsella’s idea of converting the bad debts to a long term (30-40 year) bond: http://tinyurl.com/6wt6vx

And on Anglo: I don’t get why the Government is talking about ‘working out how much to pay the shareholders’ after the nationalisation – the answer’s easy: 22c a share as that’s what they were worth yesterday http://tinyurl.com/84df4s

Agree with Alan, Anglo shares are worth zero. View the stock as a call option on the assets. The 22 cents per share price yesterday can be viewed as the value of the 0.0000001% probability they they are still solvent. If you fair value the asset side of the balance sheet they are clearly economically insolvent. Shareholders should get nothing. Thats capitalism lads.

Assume 2-3 more of the banks and building societies go same way (more then likely), then wouldn’t AMC have to be a serious consideration? Agree with Alan, an AMC is not a bank. Mandate is different. Might be a good option and it would make getting state out of banking industry easier.

What did people think of Buiter’s point that if all the banks are nationalised, then there is no longer the issue of how to price the bad assets the AMC takes on board, since they and the AMC both belong to the state? From the US TARP debate it seems clear that pricing these things correctly is incredibly tricky. I guess you could never trust FF to do it properly.

I had been expecting someone to say, in response to my question: ‘our banks are in too bad a situation for the state to take them on board, things are way worse here than in Britain, it’ll definitely bankrupt the state’, or something to that effect. And then for someone else to respond ‘yes, but we are already on the hook for them anyway because of the guarantee’. Or something like that.

Given that our problems are largely due to moral hazard in the Galway tent, the political points made by Brian and Alan also seem pretty crucial. Even in the context of just Anglo being nationalised, do we really think FF would be willing to bankrupt their friends, to minimise the losses to the taxpayer? All their behaviour to date suggests they wouldn’t. And perhaps that is the bottom line regarding Buiter’s suggestion.


Although Buiter does not acknowledge it, having the Government take temporary control of a severely undercapitalized bank is a standard technique of bank resolution. It is often the only practical way of restructuring such a bank financially and managerially. The American regulators have a suite of legal powere enabling them — indeed obliging them — to do this without the need for emergency legislation as is now proposed for Ireland.

You ask about affordability. Here is where care must be taken. US regulators are madated to find the least cost solution. Unless the bank as a whole can be quickly sold back into the market, that means that shareholders and other providers of risk capital lose out.

As Alan says, the shareholders of Anglo presumably will get nothing, when the assessor reports. The share price on January 15th merely reflected the market’s vain hope that there would be a Government dig-out for them.

Compensation for the other providers of unguaranteed and subordinated risk capital should also be made subject to an assessor or similar procedure. The draft heads of legislation seems to allow for this, though the language is a bit opaque. No way should these investors benefit from any future injections of capital that the government is likely to be making in the months and years ahead. The sums here are large — about €5 billion in subordinated debt in Anglo at the last balance sheet date, of which €2.8 billion unguaranteed, and the rest with a guarantee running only until end-September 2010.

Makes very interesting reading, my big fear is however that Sean Fitzpatrick will walk free after destroying thousands of lives and bringing the irish economy to its knees, as we all know, a share price is only worth that of its public conception. thanks to Fitzpatrick AND the financial regulator, Irelands reputation has been dealt a massif blow that will take years to re-build. Unless we get a goverment that has grown a pair of balls we are set for more of the same lies and decit from elected and even non elected servants who know that they will not be held accountable for their crinimal actions. Brian Cowen was out in Japan looking for trading partners, did no one tell him that Japan will not trade with Ireland because they seem to have the impression that we are not very straight in our dealings…now where did they get that idea???. Another few grand pissed away! But sure what the hell, just meant Cowen was elswhere when the shit was hitting the fan back home, perhaps he did want to get his shirt or hands dirty.

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