Comments on: Two Scenarios for the Banks

By: The Irish Economy » Blog Archive » Note to Opinion Columnists: It DOES Matter How We Deal With the Banks

Tue, 04 Aug 2009 21:19:05 +0000

[...] and the state has to recapitalise the banks, so the price tag is the same come what may. I first remarked on the prevalence of this line of thinking in the media back in March. However, I started to get [...]

By: Brian Lucey

Brian Lucey — Sun, 22 Mar 2009 21:08:31 +0000

James
Part of the difficulty is that for those of is that go on the meeja the time and editorial constraints are so significant that details such as the allocation of ownership etc sometimes get cut or not gotten to.
We have, I think, moved the debate a bit towards the details and now perhaps we can move it more forward.

By: James

James — Sat, 21 Mar 2009 17:00:38 +0000

There’s plenty of talk and debate about bad banks, asset insurance, nationalisation, recapitalisation etc. What’s amazing is the complete failure of most such discussion to recognise (as Karl does) the degree to which distributive rather than (or as well as) technical considerations are central.

By: Ciaran

Ciaran — Sat, 21 Mar 2009 11:59:54 +0000

Excellent post and debate, I just wish it was happening more on TV & Radio as well, it would be great to see some of this blog’s contributors on the likes of Prime Time more often debating these points. I fear if it wasn’t for McWilliams & Co there’d be little if any public debate.

By: John McHale

John McHale — Fri, 20 Mar 2009 18:56:11 +0000

One additional point: In the international debate, one argument for nationalisation is that it allows you to impose losses on subordinated debt holders (e.g. see the link below to a recent Buiter post). As Patrick Honohon has pointed out, however, the majority of the debt of the Irish banks is subject to the guarantee. Moreover — and I hope I’ve got my fact right here — my understanding is that no losses were imposed on debt holders under the Anglo nationalisation. So we can be reasonably sure the Irish model of nationalisation does not impose burden sharing of that kind.

I find the argument made by Raghuran Ragan in this NPR radio interview quite compelling (fast forward to about 2 minutes in; Ragan is yet another former IMF chief economist):
http://www.npr.org/blogs/money/2009/03/hear_starting_to_blame.html

I do not have an objection to the government using what governance power it has to replace top management. But I think we should try to keep politicians as far away as possible from day to day decisions about credit allocation. Ownership does matter.

http://blogs.ft.com/maverecon/2009/03/slaughtering-sacred-cows-its-the-turn-of-the-unsecured-creditors-now/

By: Graham Stull

Graham Stull — Fri, 20 Mar 2009 16:06:50 +0000

This post is spot-on. The difference between Scenarios 1 and 2 is exactly the allocation of the losses between shareholders and taxpayers, as well as the treatment of the current circle of executives.

In his piece in the Irish Times today, Dan O’Brien argues forcefully that Ireland must work hard to dispel its image of crony capitalism. Giving the sack to the banks execs and the wooden spoon to shareholders would be a forceful message of economic justice to send to the markets.

There is a bigger prize at stake here, which is our credibility among those who buy our bonds. If we lose that, we will really be up the creek without a paddle.

By: Mark Dowling

Mark Dowling — Fri, 20 Mar 2009 16:00:17 +0000

Here’s another silly question. Why does Scenario 1 have to involve a total cutoff at 09.2010? Think of it like Iraq - under Obama the US is “leaving” but 50,000 troops are staying.

How about Scenario 1a - gov.ie announces that from September 2010, guarantees will be reduced x%/month to baseline, tapered so that the guarantees are more sharply reduced for large liabilities in order to preserve voter (erm…) depositor confidence. This gives the banks further breathing room to reorganise under the continuing competitive advantage while providing government with a clearer exit strategy.

There is a lot of zeal in some quarters to clean out shareholders rather than given them a “taxpayer funded windfall” but who are those shareholders? Aren’t some of them those fools who followed government advice and took out pensions rather than rely on State assistance in their dotage? What moral hazard is theirs? I’m not saying it should be entirely on the State’s nickel but this is largely a question of management strategy and State under-regulation, matters a typical mutual fund holder or the retiree who loaded up on so-called blue chips had as much chance of influencing as Father Christmas.

By: Fergal

Fergal — Fri, 20 Mar 2009 15:07:36 +0000

Regarding nationalisation, does anyone believe that it is important that the nationalised banks be returned to Irish ownership and whether this will be possible? Already, we’re seeing the impact of subtle - and not so subtle - pressure on banks to restrict foreign lending and to focus on their home market.

It would therfore seem to follow that Ireland should seek to ensure that at least part of its banking sector remains owned and domiciled in Ireland rather than becoming the Irish division of a larger European Group. However, I do wonder whether the Irish market would have the capacity to absorb a newly privatised AIB and Bank of Ireland at some point in the future.

This seems to be at least part of the problem that Central and Eastern Europe has where their local banks are dependent on their foreign shareholders for capital and there are concerns that those shareholders will develop their domestic businesses at the expense of the CEE subsidiaries.

By: Enda

Enda — Fri, 20 Mar 2009 14:28:37 +0000

Karl, your analysis overlooks one important fact.

Noddy lives in Toytown, not Toyland.

By: John McHale

John McHale — Fri, 20 Mar 2009 13:51:51 +0000

Karl, your example is helpful. Critical to your example, however, is that the government overpays for the assets (25 for assets with book value of 30 but actually worth 0). When the TARP was first mooted it was indeed seen as a backdoor mechanism for recapitalising the bank. This required the government overpay in expected value terms for the assets. There was also the additional goal of reducing uncertainty about the solvency of the bank.

But doesn’t the situation change when we add in a second recapitalisation instrument (e.g. preference shares). Now we have two goals and two instruments. The goals are reduced uncertainty and a well capitalised bank. The instruments are purchases of toxic assets at expected value (to reduce uncertainty about value) and injections of preference shares (to adequately capitalise the banks. With the appropriate use of instuments, it should be possible to achieve: (i) removal of toxic assets; (ii) adequately capitalised banks; (iii) avoid the inevitable politicisation associated with nationalisation; and (iv) avoid a taxpayer-funded windfall to the banks. Hopefully, this is what Peter Bacon is thinking of.

By: Civilian

Civilian — Fri, 20 Mar 2009 12:47:59 +0000

Two silly questions.
First question refers to the following:
“it buys the bad loans from AIB and BOI for €5 billion less than their book value”.

Why 5bn? Why not 7bn less than book value? Or 12bn? Or 17bn?

Second question. After the 1980s AIB bailoit, there was some sort of bank levy used to claw back money for taxpayers over a long period. Why not same again?

These are civilian questions, I know - but since we’re paying the bill we do have some interest in these matters.

Thanks.