Arguments Against Nationalisation, Part 5: Lack of Government Expertise

[Last in Series …. For Now]

Speaking with Myles Dungan on RTE radio on Thursday, Minister Eamon Ryan put forward the following argument against nationalisation:

You have to run the whole bank, the system, from Merrion Street … And there’s no ability, I believe, in the Department of Finance to run six banks at the one time … They [the Department of Finance] recognise that you don’t just suddenly start running six banks. And you can’t do it in a very transparent way.

I think the Minister raises a fair concern here, so I thought I’d throw this one out there as my final (for now) post on this.

I will concede that nationalisation would certainly put additional pressure on the staff at the Department of Finance and new staff would need to be recruited. That said, I don’t think the lack of current banking expertise in the civil service is necessarily a crucial argument against nationalisation. I’d make three points on this.

First, one could easily imagine a world in which the ESB and Bord Gais were private companies and Minister Ryan, when asked about nationalising them, would say “Sure the officials in my department don’t know anything about the complex details of how to run an electricity or gas company.”

This might be true, but it would hardly mean that these companies couldn’t be run as independent semi-state companies reporting to the Minister, with civil servants involved in regulation and setting policy goals. This is, as I understand it, the way the Department of Communications, Energy and Natural Resources operates at present. Similarly, the day-to-day operation of the newly-nationalised banks can and should take place at arm’s length from civil servants.

Second, in light of the amount of public money at stake, there is no reason why the government should not recruit the best available financial expertise to run these banks. There is a need for a review of all senior management in these banks and for the replacement of those whose poor decisions ran these institutions into the ground.

Executives of the newly nationalised banks should be given a clear mandate to review operating practices, introduce better risk management techniques, and get the banks ready for a re-privatisation.

While incentive-based pay in finance has a terrible reputation right now, the problems of recent years occurred largely because profit-linked bonuses worked to create a mis-alignment between the short-run incentives of bank executives and the long-run interests of shareholders. In the case of nationalised banks, incentivizing the new managers by allowing them a small share of the re-privatisation proceeds would align their interests with those of the taxpayer.

Third, while management changes are necessary, there is no need for the sudden change in management structures suggested by the Minister. Existing management can be kept on and told to keep operating the banks as normal while a review of operations takes place.

14 thoughts on “Arguments Against Nationalisation, Part 5: Lack of Government Expertise”

  1. Fourth, there is no reason to believe the public sector would be any better (or worse) at running building sites and selling property, under NAMA’s banner, than it would be at running banks.

    bjg

  2. There are many cogent reasons against nationalising the banks. Prior to 30 September last, the question would not have merited serious discussion.

    Now we must ask ourselves if we can avoid nationalisation while dealing with the bad debts and recapitalisation requirements. Nothing I have read suggests that the taxpayer can be protected, or at least given some prospect of a return on investment, without the Government taking control of the banks. In that way,

  3. @Karl – don’t forget the state had three banks at one time, ICC, ACC and TSB. DoF expertise is huff and guff. The Greens would want to get their messaging right as senatorial musings on haircuts have only two outcomes – nationalisation or failure.

    Who ever said that we need 6 “good banks” – two of them are already mini-Nama’s and should be backed into NAMA. Two more could quite easily be merged with the big two – and then who ever said we need the big two as they are currently configured. Ireland dosen’t need an international bank headquartered in Ballsbridge etc.

    If people are concerned about DoF “expertise” then set up an overarching bank holding structure, expert board and resources to which the individual banks and their boards are accountable. Big board sets policy within a wider public interest perspective and the (consolidated) banks are expected to work within the boundaries established – no reason why NAMA shouldn’t be a part of this either.

  4. Seen as we are exploring ‘outsider’ ideas here, how about this one.

    Bank A sells €20billion (book value) of ‘assets’ to NAMA for €10billion, takes the write down and needs an €8billion capital injection.

    Government then nationalises bank A. Shareholders value gone.

    But instead of running the bank, they then immediately sell the bank for €8billion, which is used to shore up the bank’s balance sheet.

    No government bank running headache, a ‘clean’ independent bank without a messy balance sheet, and a reasonable price paid for the impaired assets.

    Would be a bit like a Chapter 11 in the US or a UK ‘pre-pack’ bankruptcy.

    This would all have to be done over the course of a weekend, and would (unfortunately) require both co-ordination and competency from government.

    It might not maximise tax-payer value, but it would minimise tax-payer risk.

    Just an idea, feel free to attack at will..

  5. This misses the point entirely, Eamon Ryan’s point is a typical Fianna Fail style facetious, throwaway remark.

    The government doesn’t need the detailed expertise to run a bank per se, there are plenty of people around who can run banks, that was one of our selling points for the IFSC.

    What the government does need to do and always did need to do was to set and enforce the rules under which the banks operate. It needs to do this regardless and in that sense will always require banking expertise. It also needs to decide where the balance lies in these rules, i.e. for the profits of banks on the one hand and the common good on the other.

    At the end of the day how much “expertise” was needed to realise that the property lending strategies of the banks would end in disaster for the taxpayer and indebted individual?

    It would be interesting to identify all the other ares of expertise which is lacking in the the government, e.g. technology development, green energy etc., but the government is pressing ahead with major initiatives in that area.

    Overall a dumb comment from Eamon Ryan.

  6. Isn’t DoF supposed to define policy? As a potential owner of banks they could do that (hopefully with some (non-local) experience based advice) and let the banks get on with the running, i.e. follow the policy, and do what they are told, for a change, then sell them off, Swedish style.

    Overall though I prefer LorcanRK’s idea, clean and neat.

  7. @Lorcan RK: “But instead of running the bank, they then immediately sell the bank for €8billion, which is used to shore up the bank’s balance sheet.”

    Don’t understand who ends up “owning” the €8bn used to shore up the bank’s balance sheet. Is it the Government or the new owner of the bank? If the former, does the government own some of the bank. If the latter, is the government not actually selling the bank for free subject to the new owner being able to capitalise it to the tune of €8bn?

  8. Karl,

    I’m not sure you have taken as seriously as I would (obviously!) my point about the difficulty that a nationalised bank would face in foreclosing on mortgage defaulters. I was alluding to this as long ago as January 29 (my note on “Mortgage Arrears and the Draft Partnership Pact”). Can you imagine the increased volume of protests if a nationalised bank were to do this? Though I am not unsympathetic, I think what this might do to the balance sheets needs to be factored in.

  9. Frank,

    I would emphasise that I really do take your concerns seriously. I think the problem is that we are a long way away from anything like a best-of-all-worlds solution. One way or another, we’ve been put in a position where the government is heavily involved in banking.

    In relation to this point, I would note that the banks are already reliant on state support via guarantee and re-capitalisation. Even under the government’s currently announced plans, the guarantee looks like staying in place for years and the government will have preference (and perhaps ordinary) share ownership. So even under the government’s current approach, it’s going to be hard for them to claim they have no influence on the banks. And this kind of lobbying has already begun, e.g. the Labour party lobbying for the banks to promise no foreclosures.

    My hope (and it is only a hope) is that nationalised semi-state banks can be run sufficiently independently that these kinds of pressures would be no greater or worse than they are going to be under the alternative plan.

  10. @ Daire O’Criodian.

    Firstly, the obvious caveat is that this is just an idea, as I mentioned in my original post. It is far from a finished product, and I am mindful of your superior knowledge of capital markets.

    That said, to answer your question: Yes, to option b. The new owner will get the bank for free, subject to been able to capitalise the bank to the tune of €8bn.

    There is a possible precedent for this, under Irish examinership rulings. The most obvious to me being the 2007 sale of International Securities Trading Corporation to Collins Stewart for €1 + a balance sheet recap.

    The ISTC deal was on a much smaller scale, but the fundamentals of what happened there and what could (is) happen(ing) to the Irish banks are not very different.

    ISTC went into examinership because its funding model failed. It seems clear to me that without the current levels of government support some, if not all, of the current ‘covered’ institutions would be gone the same way.

    The examinership route is far from ideal for a bank, but if the probable outcome from such a process can be ‘forced’ without the actual process happening, then there is a chance that we could end up with well capitalised independent institutions, which is what we actually want, isn’t it?

    The piecemeal approach currently favoured by the government has very large tail risks for the government and its future budgetary position. The contingent liabilities on the Irish Taxpayer are curtailing our ability to raise funds in the international market, and are serving to distract from the desired outcome. In my opinion, we have lost sight of the wood for the trees.

    It is not the government’s job to run banks, and there are certainly doubts expressed above as to their ability. It is, however, government’s job to make decisions in the best interest of the country. A healthy banking system is essential for the economy, what should not matter is who’s banking system it is..

  11. Lorcan: ISTC is not a good example as it was not a bank, it was unregulated and did not have any systemic relevance.

    Karl: I am definitely in the ‘no nationalisation camp’, however I am so utterly against the NAMA concept (as it will not work in my considered view) that I would change my perspective on nationalising if it was the only other option.

  12. @John Cobh. I did not mean to draw a comparison between ISTC and Irish banks, I merely used ISTC as an example to illustrate what has happened to an institution that entered examinership in Ireland following funding problems.

    The examiner decided that ISTC should continue as a going concern, ie there was a business there that deserved saving. As such, only, I think it will serve the illustrative purposes I require of it.

  13. Lorcan, sorry I missunderstood the intention of the comparison. I thought it was serving as a proxy for bank examinership which obviously would not work.

  14. For the working class the debate over whether to nationalize Irish banks or support NAMA is a false debate. It is a debate that has been whipped up by the bourgeois media and a substantial component of the bourgeois political establishment together with sections of the radical left. Neither NAMA nor nationalisation can serve the class interests of the working class. Either policy is essentially bourgeois in character. Consequently the debate is really a debate within the bourgeoisie as to what option best suits its class interests. Much of the Irish Left support nationalization. Some with the qualification of nationalization under workers’ control. But such qualifications make little difference to the essential nature of the policy of nationalization as a bourgeois policy. Under capitalism the workers can never control the banks. It is a contradiction to suggest that banks can be controlled by the working class. By definition workers can never nationalise the banks under workers’ control. They can only annihilate them by destroying capitalism without which banks cannot exist.

    The planned march for the month of September against NAMA is an attempt to organize the working class around the wrong issues –an issue from which the working class have nothing ultimately to gain. It is similar to organising a march against the Fianna Fail party and for the Fine Gael party. The left that promotes this march are playing the working class right into the hands of capitalism by rallying the workers around an issue that is about the class interests of the bourgeoisie and thereby against the class interests of workers. There is a strategy afoot by People before Profits and the Socialist Party to misdirect the working class into a struggle against itself. The prospective NAMA march is just this. Mass marches should have been held months ago against the income levy –admittedly there was the odd isolated protest in the absence of the general active support from the trade union leadership as a whole. The ICTU and other elements within the labour movement successfully obstructed attempts to organise a mass strike and demonstration. This was a decisive piece of treachery. It has seriously weakened the working class struggle. There need to be rallies and other forms of mass activity against the cut back in the living standards of the working class. A gigantic rally is needed to express popular opposition to the forthcoming slash and burn budget. Protests, rallies and strikes need to be linked into each other to create a continuum of struggle culminating in mass opposition to the forthcoming budget. Slogans expressing the class interests of the working class are needed.

    If old age pensioners can “successfully” organize against the abolition of the free medical cards for OAPs swiftly then the labour organizations can surely organize at least as swiftly against the income levy and many other class issues. So far the Irish state and its bourgeoisie have had an easy run. There has been minimal resistance to the crassly anti-working class policies of Fianna Fail and the Greens. If anything the bourgeois left have been at most fertilising the conditions for alternate capitalist parties gaining power –Fine Gael and Labour et al.

    Paddy Hackett

Comments are closed.