Arguments Against Nationalisation, Part 4: Continuous Stock Market Listing

Peter Bacon’s final argument against nationalisation in his Morning Ireland interview was the following:

Also, if you nationalise the bank, it’s gone. If the bank remains there, even if it comes to pass that in some cases there is majority ownership by the government, by the taxpayer, there will be a quotation on the Irish and London stock exchanges. There will be a price every day that bank shares will trade at and that will provide taxpayers with an exit mechanism out of their ownership of the banks in due course.

Personally, I can’t see any merit in this argument.

A nationalised bank isn’t “gone”—the banks will still be there, customers won’t notice a difference and even the famous “sign on the door” won’t change. And taking the bank off the stock market doesn’t in any way leave the state without an exit mechanism. Companies come on, and are taken off, the stock market all the time.

The Irish government already has experience of floating large state companies on the stock market in IPOs (Eircom, Aer Lingus) and our fiscal problems may well require them to repeat this process with a number of other state businesses. So, as an argument against nationalisation, this just seems to be clutching a straws.

A related argument (quoted in today’s Sunday Times) from the Minister for Finance is that it is best to keep the banks quoted on the stock market because this will keep them “under market surveillance”. There may be something to this argument but I wouldn’t push it too far. These would be the same markets that did such a great surveillance job before.

A final argument in this vein came from Brendan Keenan on this morning’s Marian Finucane radio show. Keenan argued that it was important to keep the banks listed on the stock market because if we took them off, the only way we could get the banks back into private ownership would be to sell them fully to foreigners.

Quite apart from the silly xenophobia (could these dreadful foreigners possibly be worse at running our major banks than the Celtic heroes who have run them into ground?) the fact that the banks could be IPO’d on the stock market means that this argument is substantively wrong.

13 thoughts on “Arguments Against Nationalisation, Part 4: Continuous Stock Market Listing”

  1. A few points here.
    a) I would not ever refer to Eircom (political / social economy again) when talking about state IPO’s to the irish people!
    b) There is no need to IPO. A voucher IPO mix would be a nice way of refloating as well as avoidin the more dumb statements such as the usually on the ball Mr Keenan notes…
    c) Do we know if there is, as I suspect, such reputational damage to the banks that they are brand-toxic? If so, keeping them there (with what, 3% fre float after recap?) may do more harm than good.

  2. Keeping the free float of a small percentage of shares is wrong.

    To my mind, the argument is very simple. The investor appetite for a minority shareholding in a semi-state body (as the banks would be) is very very small.

    So, the market price of the banks would always be artificially depressed, as long as the government (ie us) own a significant share of the bank’s equity.

    For example. The market price of Bank of Ireland, with a government shareholding of 60% is €1.20. This price is depressed by 40% because of investor concern that the government may go for full nationalisation. So if the government tries to refloat all it’s shares at market price, they will be subject to a 40% discount.

    On the other hand (sounding like a proper economist) if they fully nationalise, when they decide to sell the bank, they will get the proper market price (€2) per share rather than the market discounted price..

    In my opinion, keeping a free float guarantees a depressed market price..

  3. When was the last time BOI or AIB went to the stock market to raise funds? Why is a market listing important to a bank?

  4. There are those whose view is based on history and its lessons and those who sense what the future holds – the current state (Bacon, Keenan et al) will defend their world view based on shared language and understanding of what has happened – rather than what will now happen. Thus far argument is based on problem resolution using what appeared to have worked on the past. Instead people should focus on what is likely to evolve and plan to be there when it does.

  5. Lorkan – coulnt agree more. But will the DoF agree same….Im not convinced that they really understand the markets.

  6. If what this report says is true – i.e., NAMA to buy assets at 50 percent of face value, then it is really just a question of what order things happen in, i.e., do they transfer the loans first and then nationalize, or do they nationalize first and then transfer the loans.

  7. Surely a legally and politically more straightforward alternative to the proposed NAMA structure would be for the banks themselves to foreclose or threaten foreclosure on delinquent property development loans and for the government to buy the property at 50 percent discount (although others might be willing to pay more, unlikely though). The banks would still need to be recapitalized, but that’s going to have to be done anyway.

  8. Although huge uncertainties remain about NAMA it appears the die has been cast. There seems to be a firm Government commitment to fast-track the necessary legislation. The more seasoned observers (e.g., John McManus in today’s IT :http://www.irishtimes.com/newspaper/finance/2009/0413/1224244557107.html) are looking forward to the next stages in the campaign, though, perhaps, John should not have framed his piece by referring to the military theories of Von Moltke, the 19th century German Field Marshall, whose ideas were employed by the German High Command – long after he had shuffled off this mortal coil – at the outset of the Great War and led to four years of carnage in the trenches. Though, then again, he may be prophectic.

    This is a story the Government can keep running, largely, on its own terms and it will help to deflect attention from the contractionary impact of the budget, the failure to tackle competitiveness and the lack of any forward-looking investment stimulus. The strategy – if it deserves to be so graced – is to sweat it out both economically – in the hope that any hint of a rising international tide will lift the Irish bádín – and politically – doing the minimum to damage the Dáil arithmetic.

    Rational economic analysis and observations – such as those posted on this site – will have minimal traction. The lack of traction may also relate to the possibility that conventional microeconomic analysis has not proved to be sufficiently adaptable to inform competition policy and regulation to deal with over-mighty firms while consumers are being atomised, isolated and manipulated. This is market failure on a huge scale and it is not being addressed effectively. Modifying the Jeremy Paxman approach when dealing with government ministers in the UK of “Why is this bastard lying to me?” I tend to treat every large and overmighty firm as a conspiracy against the public until they prove otherwise.

  9. Wow, and they say economics is miserable…. not on this forum….

    I am wondering if the whole affair is entirely political. 1. FF et al don’t like the prospect of losing, they hope that NAMA etc., wil confuse the punters and damage will be limited to the upcoming local and europeans… next general election 2012, boats rising…. 2. The ECB is wobbly about a € member with nationalised banks, the ECB would have to pick up the tab if the money lenders baulk at lending to (small) nationalised entities. 3. FF is agin nationalising as a policy, their friends in the money business won’t stomach it.

    The only question? what the h is keeping the Greens in there? In principle they should be pro nationalising…. better political management of assets and spending.

    OK, ruminations over, back to the economics.

    The only intelligent commentary I’ve heard since Tues., the Swede on Finucane yesterday…..explaining that NAMA etc., isn’t the Swedish solution, they nationalised the worthwhile banks first, then sorted their books, then valued the assets…. etc.

  10. This government is guilty of many recent policy blunders HOWEVER there is one which ranks well ahead of all of them. NAMA! This will is the most pointless, badly thought out and irresponsible project.

    Around the IFSC those who work in the financial sector (incl those in non Irish firms!) are in awe of the plan – not in a positive way. As far as we can see it is a complete waste of time and financial suicide as currently proposed. I outlined the many reasons already on this site.

    Removing bad loans from one state backed entity (the irish banks) to another state entity NAMA will have no positive financial effect (i.e. if true market price is paid more capital will be needed in the banks, if instead an inflated price is paid it lead to massive day-one loses at NAMA) and worse it will lead to distressed enforcement as opposed to proper work-out agreementsvwhich put asset/land prices into a death spiral ensuring that NAMA takes second eye popping loss – in the billions – in the process.

    In the meantime no or very little finance will be available from any institution for any new greenfield developments for a very long time.

    The other clanger is that since the begining of the year nearly every other loan asset class has become infected by the downturn (and of course the bugdet has aggravated this) – so are we to expect a NAMA Mark II, III .. for bad mortgages, company loans, credit cards?

    I really hope the government reconsider this NAMA approach soon – there are better and less risky alternatives. If not we will NOT recover for at least a generation – the amounts and unacceptable risks involved will ensure this.

    I am against the outright nationalisation option HOWEVER if it was the only alternative to NAMA then bring it on.

    John

  11. NAMA is a daft proposal and sadly dangerously so. It should be abadoned with great haste for all the reasons you and other NAMA opponents on this site have outlined.

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