Banking Crisis

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.

14 replies on “Arguments Against Nationalisation, Part 3: Transparency”

I like it!

One chance in ten any of this goes ahead as there is no capital to spend anything near 90Bn. HSE was to let bodies go, but …….. couldn’t afford it.
Haven’t we wasted enough talk on this bank business? Pie in the sky, guy!
Remember Iceland!

Karl . Agreed . many of us have called for nationalisation for this and a host of reasons. But….they aint listening. so, what now can we do?

I wouldn’t give up yet Brian. As Patrick has pointed out, in theory, there is no reason why the NAMA process can’t end up with a market price being paid for these assets and the state ending up full ownership or something close to it.

However, where political concerns set in is that (as I pointed out to John McHale yesterday) most of our senior politicians and officials appear to be convinced that nationalisation is A Very Bad Thing. Against this background, it’s hard to imagine the pricing of assets that emerges from the NAMA process representing fair market value.

So, one reason to have a full and frank public debate about the strengths and weaknesses of nationalisation as an option is to hope that it can have some influence on those that matter in the NAMA process.

I would like to see a much greater level of transparency for NAMA that what is being advocated here. The price paid is one thing but how the NAMA operate after this is even more important in my opinion.
Ireland’s reputation has been severely damaged by allegations of crony capitalism.

The NAMA should publish the book value of each individual loan, the price paid for the loan, the collateral available and the value of that collateral and any deals reducing the outstanding loan.

Borrowers who are unwilling to be subjected to this level of openness should be given the opportunity to refinance their loans outside the NAMA and the 6 guaranteed banks.

This would allow to the state to quickly reduce its exposure while ensuring that what remains is dealt with in as transparent a way as possible.

@Karl. your an optimist…I like that. Im avoding going overtly political here as this isnt the place, but we do I think need to realise that we are into Political Economy bigtime here : we need to keep convincing the politicians at all levels that nationalisation is inevitable, and should be done on the best terms not the state being bounced into it.
Having seen the system in action in the 1980s when faced with a fiscal crisis and as close to unanimity as one will get in the social sciences, and ignoring it, I am less than optimistic. wont shut up tho…!

I recommend (this may sound naive) a collectively signed open letter making the case for nationalisation: “Economists for Nationalisation”. Better yet would be a full page newspaper ad (maybe ICTU would help finance it since nationalisation is their position). The point anyway is to clearly establish in the public/media consciousness the fact that nationalisation has the (qualified of course) support of Serious People, not just wildeyed lefty loons.

@James Conran
I think that is a fantastic idea!

NAMA is the single biggest decision an Irish government will ever make. If there are any doubts that the current strategy is the best possible way forward for country the Irish economists should make their voices heard loud and clear.

It is stunning to argue that nationalisation would lack transparency when the process for buying assets from the banks will itself be so unclear.

I note that Frank Barry has raised cronyism as a potential argument against nationalisation and the fear that politicians would be under political pressure to save jobs by not calling in bank loans.

Obviously, a response to this concern is to make any nationalised bank statutorily independent of government.

The concern about indirect political pressure may remain. But that brings us to the real point. The lesson of the last ten years has been not that government has been too close to ordinary voters, but rather that it has been too close to the banks and developers. That’s what has been all over the tribunals and most of the scandals in recent times.

For sure, the danger of cronyism is a factor – but one in favour of nationalisation, not against it.

Nationalisation is pretty obviously the right way to go, it seems to me. And selling off the banks quickly thereafter would remove many of the concerns about croneyism. Of course, the logical purchasers might be foreign (which would be great, if croneyism is a concern), and I wonder if nationalism may not be standing in the way of the national interest here.

Thanks to Karl for writing so assiduously on this.

It is important that ‘nationalisation’ be called ‘pre-privatisation’, I think Nouriel Roubini suggested this form of words previously.

It is a sign of the times that a general affairs programme like Marian Finucane’s can host a discussion of this calibre.

I think the most interesting element was the triangular discussion with Lundgren, Brendan Keenan and Colm McCarthy. Keenan basically said the only credible reason not to nationalise was the fear that only foreign buyers would be available when they were re-privatised. Colm McCarthy was unwilling to criticise the NAMA plan but he clearly had concerns about the risk to the State’s finances (which would fit with his Bord Snip 2 responsibilities).

He said Sweden had spent 4 – 5 % of GDP in bailing out its banks (which it was later able to recover). McCarthy thought the cost to Ireland might reach four or five times that figure. That implies up to 25% of GDP which might equal €40Bn. if he is talking about the likely GDP for 2009.

[…] Second, I find it a bit disturbing that the government is apparently taking credit for the timing of the latest banking announcement. Are we to take from this that there was deliberate foot-dragging in the preparation and passing of legislation and in the legal and preparatory work relating to the transfer of the first tranche of loans? Perhaps, but I’d reckon this is more cock-up than conspiracy. The NAMA process of paying private sector banks for loans, involving detailed loan-by-loan evaluations was bound to be slow and tedious. Indeed, avoiding such a process was one of the arguments put forward in favour of nationalisation by the IMF and, em, me. […]

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