Arguments Against Nationalisation, Part 3: Transparency

Peter Bacon outlined two other arguments against nationalisation in his Morning Ireland interview. The first related to the question of transparency:

You nationalise it and then you would still have to deal with it. You would be dealing with it behind closed doors. People have screamed “let’s have transparency with this”. The only place you will find transparency is if you do this in the open market.

Given the amount of public money at stake, I couldn’t agree more with Dr. Bacon that transparency is essential. However, I disagree with him regarding the levels of transparency that would prevail under nationalisation relative to his NAMA plan.

Transparency Under Bacon Plan

Let’s first consider the Bacon plan. We really have no idea how NAMA is going to price the assets of the banks but one thing is for sure, these assets are not going to be sold to the government in the “transparency of the open market.” If the banks could have sold these assets in the open market and survived, there would have been no need for a Bacon plan.

Already, we are hearing a wide range of discounts for these assets being quoted as being appropriate by various commentators, so one way or another, the process is likely to leave some people complaining that the process was unfair. Most likely, NAMA will involve an accountancy firm in this process and given the ambiguities involved in accountancy-based estimates of asset values, it is likely that the valuation process will end up being pretty murky. My guess is that the public will end up having little understanding of how the NAMA pricing process worked.

Bacon himself has hardly been forthcoming about the pricing process under his plan. In his Morning Ireland interview, he declined the opportunity to suggest an appropriate discount for these assets, even though his report had provided an estimate of the level of impairments — the mysterious €X billion figure on the first page. His reason for not being willing to discuss this issue was that this information was “commercially sensitive.”

Transparency Under Nationalisation

Now let’s consider nationalisation. Readers may be surprised by this but one of the real advantages of nationalisation is that there is no need to go through a complicated and controversial asset valuation process once the banks have been nationalised. Money paid by the taxpayer to state-owned banks has no implication whatsoever for the government’s balance sheet: This is just the left hand paying the right hand. This removes the least transparent aspect of the NAMA process.

To maximize transparency, the process could proceed as follows:

1. The government purchases the bad loans from the now state-owned banks at full book value, which means something like the €90 billion figure being mentioned. Re-capitalised and cleansed in this manner, the banks can be prepared for privatisation and then sold off.
2. A state asset management agency (call it NAMA if you want) is then charged with selling off the assets (in the full transparency of the open market …) and is legally required to publish a quarterly report providing updated estimates of the value of its portfolio.
3. The combination of NAMA’s final tally of the amount obtained from selling its assets and the full total of proceeds from privatisation of the banks will be publicly available information. These combined figures can then be compared with the €90 billion spent on the bad assets and this will reveal, in a transparent manner, exactly what the final cost (or possibly, profit) has been for the taxpayer.

So, to my mind, nationalisation would produce a far more transparent process than the one that the Bacon plan is about to unleash.

Update: There was a very useful discussion of NAMA on this morning’s Marian Finucane radio show (starting at about  44 minutes in).  Former Swedish finance minister Bo Lundgren discussed the Swedish “bad bank” scheme, the details of which have been widely mis-reported in this country.  Lundgren makes it clear that the bad banks were only used to purchase assets from the two banks that had been nationalised.  While they did have a valuation board to set a price on the transferred assets, Lundgren makes clear that this was only for accounting purposes and that it did not matter substantively because the government owned both the nationalised banks and the asset management agency.