IT Opinion Piece on Nationalisation

This post was written by Karl Whelan

Readers may be interested in this article in today’s Irish Times in which some contributors to this blog and a number of other leading academics argue in favour of temporary nationalisation of the banks.

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33 Responses to “IT Opinion Piece on Nationalisation”

  1. Graham Stull Says:

    This is absolutely excellent. Cogent, well-written and timely. The government would do well to heed this message and reconsider its position.

  2. Stuart Blythman Says:

    Am I the only one who worries about the government being allowed to run our banking system.

    The article assumes the current crew who run the banks will be turfed out (not unreasonable in my opinion given the mess they have made) but who will they appoint? They don’t have a great track record in appointing appropriate people to boards.

    Whoever runs the banks will have to be absolutely independent of political interference and be allowed to make decisions that are right for the bank. Again track records do not suggest this will be so. Banking is a business, if they try to run it as an arm of social policy or employment policy it will be a disaster.

    Transparancy will be vital. But again the governments track record on transparancy is very poor. At least a plc has to report to its shareholders what it is doing. If the banks are nationalised we’ll get nothing but the usual non interviews politicians appear to be programmed to give these days.

    Finally their track record in selling off state assets (which the banks will be) is not a good one either. How is Eircom doing these days? Confidence of international investors to put money in when they got burnt (i.e lost all their money) before will be key. These banks are going to have to look pretty fantastic before anyone invests new money. Many foreign investors just won’t touch Ireland Inc again.

    Initially the people who pay for this will be Joe Public in their pension funds and savings which while fairly wiped out already, there is hope that there might be some gain later on. Nationalise and that hope is gone. I will be open - I do have a few shares, not enough to keep me awake but it will be like a second mini budget!

    After that the taxpayer will pay, as I fear the nationalised banks will be run so badly and the wrong decisions will be taken.

  3. Andy Says:

    Great work, this needed to be done, takes a lot of courage to do this, watch RTE and government try to block them access now…

  4. Veronica Says:

    Interesting piece in today’s IT. You’ve opened up a debate on a major strategic policy decision and that’s no bad thing. I find some of the arguments made in the article compelling, but…

    Like Stuart above I think the flaw in your general thesis is that it is based on an expectation of rational and logical behaviour in the banking system and in politics. Ireland is not Sweden. Things don’t work like that here. They never have.

    For example, for the nationalisation solution to work presumes a wholsesale clearout of existing bank management and their replacement with top drawer operators, preferably from abroad. Where are you going to get them at the ‘capped’ salaries and non-existent bonus terms of employment on offer? But the real worry has to be the level of political interference in the operation of our banking system if all its main institutions are nationalised. Flawed and all as it may be, Bacon’s proposal suddenly begins to look a more appetising dish.

  5. George Says:

    Seems political interference is a given regardless of which solution we pick.

  6. Padraigh Griffin Says:

    If wholesale nationalisation of our indigenous banking system is the panacea, why so have no other country in the current crisis undertaken this appropriate solution?

    Considering every economy is facing a crisis in banking, why do we have to nationalise banks that have tangible equity far in excess of their European or US counterparts. The first round writedowns in the UK, US, and EU were largely based on CDO’s, Subprime, derivatives, monolines etc. and now they too face the secound round impairements that economic factors such as unemployment create. So why not just recpatilise in tandem with NAMA.

    The British Banking system was far more damaged than ours.
    So too was the US banking system.
    The European banks such as Fortis, UBS, etc. were far more toxic than AIB or BOI.

    The NAMA is a solution that might work. The assets purchased at discounted values will be worth a lot more in 3/4/5 years time. The current firesale price does not reflect a functioning market. As with all industry, once housing inventory rebalances (which in my opinion could be much sooner than we think) development land will once again become an valied operating market. Long-term demographics and urbansiation will create a strong demand side once again.

    AMC worked in Sweden (as opposed to Japan lost decade Zombie banks). Sweden only nationalised 22% of its banking systems assets. Think about what you are proposing here in this context.

    The taxpayer faces far greater losses and consequences from nationalisation. Who will re-purchase the cleansed banks, who will recapitalise them. There is no sound ‘exit strategy’. The sheer logistics of appropriating the entire indigenous banking system temporarily and offloading it is far more difficult and risky than NAMA.

    With Nama, their is plenty of scope to mitigate losses if they do occur. The clawback levy and the potential for shareholding stakes in cleansed banks will see to this.

    The most pressing concern is the socialisation of the banking system. What a complete disaster this would be for our economy. We are not in the ‘dire straits’ yet that would necessiate a move to outright socialism of the most important lifeblood of the capitalist system. Yes.. lets put the government in charge of credit and see how that works out. Lets just look at their CV in relation to running a business. Ireland INC has not faired too well.. nor have most state controlled institutions in the past.

    I, as a taxpayer would be very worried that the rationale for providing credit would not be based on the economic potential of the enterprise, but would be subject to political bias and interference. This is crazy talk in my very humble opinion. These enterprises such as AIB and BOI have been very effective in the past. Yes they have made mistakes, but what business worldwide anticipated the scale of the current economic downturn? Do we really have to destroy some of our indigenous business that has prospered and created some much economic benefit for this country in the past.

    Banks are being made the scapegoats for the current crisis. Some of this is right and some of it misguided. The government were the ultimate creators of this crisis in Ireland. Their reluctance to stifle an overheating economy was bad policy. The banks just oiled the wheels of government policy and in tandem their short sightedness created an inflationary bubble in housing. They did this together, whilst they remained apart. Working as part of one entiity we could create a far bigger monster.

    The answer. in my opinion.

    NAMA
    Private banks with government holding in region of 30-40% (upside participation)
    Sounder economic policy
    Higher levels of regulation.
    New management in all institiutions.

  7. Myles Duffy Says:

    Does the Government really have the capacity to direct and control up to six extremely complex businesses and the necessary resources? What prevailing models of State intervention could be emulated with confidence? The country is somewhat short of specimens. While the overarching concept of nationalisation contains features that are potentially attractive the question on the minds of many observers is whether they are realistic and achievable.

    The scale and complexity of this debacle is unprecedented as the collateral damage of The Great Famine, without the loss of life.

    If one, or more of these entites failed in nationalisation the current reputational damage would be componded without any secondary recourse.

    Are synergies envisaged that could not be otherwise realised? None have been achieved at the HSE. There is also the threat of a new set of vested interests arriving on the scene whose enlightened self-interest could be uncommercial in outlook, to say the least.

    The time necessary to rehabilitate these businesses could be far greater than the authors enviage in oder for the intitiative to be merely ‘temporary’. I would imagine the markets would require the assurance of prolonged stress-tested proving period, perhaps much greater than would be the case with a business seeking an IPO.

    To conclude, I think much debate is need to identufy the proverbial devil and associated detail before one could enjoy a sense of reassurance on nationalisation.

  8. Brian Lucey Says:

    There seems to be an asusmption or fear amongst some that nationalisation means an AP seconded from Dept Fisheries will be the loan officer and some young wan from the board of works the new CFO.
    Speaking for myself, and I suspect the others who signed, I assume that professional bankers will continue to work (harder) to get the mess sorted. Political interference would be madness ; but will NAMA plus banks which hope not to be taken out totally please not us Mr Cowan be any better?

  9. Tadgh O Laighin Says:

    Well said Padraigh Griffin— a strong gust of reality and common sense ; The main Irish Banks have for many years been lauded throughout the world for their professional strategic and operational management . Yes major mistakes have been made over the past few years in terms of lending criteria —–common with rest of World—-but consider it unfair to now damn Bank Mgt as an “incompetent shower”. The very postive results from major Banks in USA over the past week shows how quickly the tide can turn. As Padraig rightly points out that taking “a NOW ONLY” valuation off the assets is very onesided in taking a side in argument but in no way fair to all sides .

  10. LorcanRK Says:

    I tried to post this link earlier, but I guess it was caught by a spam filter somewhere, so I have tinyed it.

    http://tiny.cc/zX0vM

    It is from today’s FT markets blog. The tongue-in-cheek ‘raging Bolsheviks’ accusation is amusing..

  11. Veronica Says:

    Brian,

    In answer to your last question: Unequivocally, yes!

    The statement “political interference would be madness” simply underlines the political naivete of the nationalisation proposal. There doesn’t have to be direct political interference; an insidious political pressure would be present in the nationalised institutions from day one and would do the job nicely.

  12. Tullaman Says:

    Well done all of you for coming out and saying what needs to be said.

    The public is generally confused as to the differences between Nama, Nationalisation, guarantees and so on. So we need an informed and expert opposition to the kind of half baked policies we are getting at the moment.

    Get on the interview circuit and keep the pressure up over the next few months. Seriously - your country needs you!

  13. Ciaran Daly Says:

    Great article in the times today, very clear & concise, and well done to all involved in highlighting this issue, hopefully it will spark a greater debate on this important issue.

    There is also a fierce debate on the crony bank bailout in the States:-

    ‘Stiglitz Says White House Ties to Wall Street Doom Bank Rescue’

    http://bloomberg.com/apps/news?pid=20601087&sid=ahnPchOxZMh8&refer=home

  14. Seán Ó Riain Says:

    The problem with all of this - even the temporary nationalisation plan, for which I commend Karl in particular - is that it doesn’t necessarily get us different banks from the banks that were not lending to productive and innovative businesses over the past ten years and that failed to develop any investment vehicles for people who might want to invest their private funds in such activities and enterprises.

    The evidence is clear and I lay it out in a short paper here:
    http://www.tascnet.ie/upload/BanksStateFinance_SOR.pdf

    Even Batt O’Keefe is now talking about going to the pension funds to see about investing in education related projects.

    For all the talk of political interference, the other point on which the evidence in the paper is clear is that state agencies have been much more effective in marshalling investment for production and innovation. Not only that, it is now clear that the bulk of the business development expertise within the ‘financing community’ (across public and private) is not in the banks but in the state agencies. This is of course recognised in the recent ’swap’ of expertise (read: training of banks by state agencies) detailed here:

    http://www.irishtimes.com/newspaper/ireland/2009/0331/1224243731729.html

    The model of banking that we have had has not been effective and ‘political interference’ has, in some of its guises, been highly effective. The serious conversation to have here is about how to design the institutions - public and private - that can deliver high rates of investment in the kinds of activities that will generate sustainable prosperity.

    But that will require significant changes in the business models of the banks, the incentives for different kinds of investing, the regulatory regime, the oversight of the regulatory regime itself and the recognition and serious discussion of what public agencies have already done, and continue to do quite effectively, within this system. To my mind, that is the basis of a serious discussion of where banking reform should go.

  15. Chris Cook Says:

    My take on this is from 20 years practical experience of markets generally and market regulation in particular including several years as a director of the International Petroleum Exchange. For the last ten years I’ve been concentrating on the area where markets and the Internet converge, and on the potential of new partnership-based legal and financial structures, with backing from the Norwegian government agency, Innovation Norway.

    At FEASTA’s annual lecture in Dublin last November I set out

    http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-credit-crash-presentation

    a practical mechanism for the conversion of the huge amounts of unrepayable secured debt into what would be a new class of Equity. In Eire’s case, this would require legislating a similar vehicle to the UK LLPor UK LLC which enables the “unitisation” I have in mind.

    However, with a little imaginative thinking about the constitution of NAMA rather than to create a huge boondoggle of a conventional Organisation, it is possible to create within the framework of a NAMA “Land Partnership” agreement an entirely new class of Unit investment to replace bank debt.

    A NAMA Corporate Land Partnership would work as follows:

    Step One - transfer distressed properties to one or more Custodians (probably local municipalities and councils).

    Step Two - set a rental in respect of the properties: if they are occupied, this should be set at an affordable level;

    Step Three - index link this rental to a suitable rate of inflation;

    Step Four - pool these rentals into a NAMA Rental Pool and allocate a proportional share to a Manager consortium;

    Step Five - “Unitise” this Pool through the simple expedient of dividing it into proportional Units eg billionths.

    The result is a new class of property based index-linked units of quasi Equity in NAMA.

    There are several advantages to the model.

    Firstly, there is no need for a loss to be crystallised for Banks, who are giving up both an asset and liability, and receiving in return Units in the Pool.

    Secondly, the cost of financing drops dramatically, since no debt is being repaid. Units are property-backed equity in a NAMA Corporate quasi-Partnership.

    Thirdly, for Occupiers of property, this is a form of rent to buy, since by paying rental in advance, or by maintaining the property themselves, they may acquire Units, and by acquiring enough Units, they will in economic terms own the property, even though the land remains in the stewardship of the Public sector ;

    Fourthly, the distressed developers may participate in developing the land and incomplete properties by bringing in contractors etc as development partners and sharing in the gains through receiving Units in the uplifted rental values.

    Fifth, the asset class would be a perfect pension investment within Ireland, and a first rate € denominated investment for external investors based upon direct investment in Irish property rentals. Note that since affordable by definition implies certainty, these index-linked Units would command a relatively low rate, and they are of course Sharia’h compliant at a deep level.

    This is a simple, but radical, concept which I believe opens up major opportunities for reconfiguring Ireland’s beleaguered financial system through the innovation of what is to all intents and purposes embryonic “National Equity” in NAMA.

    The model is getting considerable interest in several countries. I recently gave evidence to the Scottish Parliament’s Economy, Energy and Tourism Committee in reepect of its use for energy finance, for instance. Also, in view of its Sharia’h compliance, in the Middle East.

  16. P L Malone Says:

    What’s happened to productivity? The Communist Manifesto (1848) had only two authors.

  17. karl deeter Says:

    nationalisation, what a great idea if pandering to the will of ‘the people’ was the aim. What any kind of ‘take over’ would do in the current environment would be to ruin Ireland’s financial institutions as a viable option for investors, and that would play through to the rest of the country too.

    Are there any capitalists left? Are we all becoming Socialists as well as Keynesians?

    As a shareholder I’ll only be burned by any given bank bank once, Anglo won’t ever get another investment penny from me so the argument of ‘we’ll give them back when the good times come’ just doesn’t wash.

    protecting the taxpayer isn’t the point, ensuring our banking system survives in a meaningful manner is, and unfortunately the two are not synchronised, Bacon got it right, he’s not a ‘moralist’

  18. Karl Whelan Says:

    Thanks very much guys for the feedback. The issues raised are important so I’ll try to respond as best I can to what we’ve had so far.

    I have discussed the issue of politicisation of the banks before on this blog. I take it very seriously and have strongly recommended at all times when discussing this issue that nationalisation be temporary, run by highly independent boards, and with a view to privatisation at maximum value for the share holder. A clear mandate and transparent reporting structure can deal with many of the problems that are being referred to.

    Beyond that, I’d make three observations:

    1. Those who worry about politicisation should remember that the government’s three-pronged recap-NAMA-guarantee strategy is bound to keep the government heavily involved with the banks for years. Not surprisingly, I’m with Brian Lucey on this one: I think this mix is likely to lead to more (not less) political entanglement. It’s happening already.

    2. I found Colm Martin’s comments earlier today to be heartening. He wrote about how previous experiences with state-run banks such as ACC and TSB had actually worked quite well. I think we should try to take a balanced view of the past successes and failures of Irish semi-states and they are not always be negative. Colm’s comments are here:

    http://www.irisheconomy.ie/index.php/2009/04/10/arguments-against-nationalisation-part-1-politicisation-of-the-banks/

    3. Those worried about the cost to the taxpayers of losses from state-owned banks would be advised to consider the potential cost to the state of NAMA. If NAMA pays a 15% discount on the 90bn (as recommended by Davy’s) when 40% is closer to fair value, then that’s an overpayment of 22.5bn. The temporarily state-owned banks would have to make a hell of an amount of bad loans to be worth that level of overpayment.

    For those who are worrying about their shareholding in these banks, I would point out that pre-NAMA-proposal, I recommended implementing nationalisation via paying the listed market value for the banks. Things may be a bit more complicated now, but I certainly would not object to compensating shareholders at something like the average value of the past few months. And those of you worrying about “losing the upside”— trust me, I’m sure you can find companies with better upsides than the current versions of AIB and BOI.

    Some replies to specific comments:

    @Stuart: Thanks for raising Eircom because it’s important to debate this one. My bottom line on this is that Eircom was a successful privatisation for the Irish taxpayer. After floatation, the share price went down and some people who could have sold quicker lost money. That’s how stock markets work; sometimes you win, sometime you lose. The share prices of the privatised banks well go up or down after their floatation, but we don’t know what’s going to happen and can’t let worrying about that affect our decision now.

    @Veronica: I don’t recommend capped salaries. In fact, quite the opposite. I recommend giving the new management generous share options for the privatisation. And of course, one must keep in mind the performance of current management hasn’t been crash hot.

    @Padraigh: I don’t think the government should pay above market value on the grounds that someone thinks there is a higher “fundamental” value that we might obtain down the road. Taking a risk like this with €90 bn would be irresponsible at the best of times; at a time of fiscal crisis, it’s crazy. As for “AMC worked in Sweden”, I’d refer you to my recent post on Sweden. The government AMCs only bought assets from nationalised banks.

    @Karl D.: I disagree very strongly with “protecting the taxpayer isn’t the point, ensuring our banking system survives in a meaningful manner is, and unfortunately the two are not synchronised,”

    Let me quote the IMF: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed. While permanent public ownership of core banking institutions would be undesirable from a number of perspectives, there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.”

    Stabilising banking systems via temporary nationalisation in a way that protects the taxpayer has been done before and can be done here. You may not want to invest in banks that have been re-privatised and that’s your prerogative, but others will be happy to invest in strongly capitalised banks with no toxic development loans and strong retail bases.

  19. Brian J Goggin (bjg) Says:

    @Stuart: “Am I the only one who worries about the government being allowed to run our banking system.”

    Well, we could leave it to go bust.

    Or rather to admit it’s bust.

    I mean, I don’t actually want to give it numerous gazillion, or even to guarantee its debts for numerous gazillion. It could always try to raise the loot on the markets without the assistance of Sean Taxpayer.

    bjg

  20. Padraigh Griffin Says:

    Karl.

    My point regards Sweden is that it only nationalised 22% of the banking systems assets, which was considered quite radical. You are advocating nationalisation of a a far greater % in Ireland. My other point about Sweden was that the AMC worked (irregardless of where the assets came from) as it did not lead t olarge losses for the taxpayer.

    As regard fair value for the assets. It is essentially impossible to value the assets as there is currently no market for them other than extreme firesale prices. There area lot of assets worldwide in this category (notably since Lehman failed). I believe that land has tangible value particularly in relation to complex derivatives and it is not unreasonable to assume that once current housing inventory rebalances and the economic cycle turns that these assets could not soon find a true economic value, not a dsitressed one. Demographics and urbanisation trends reinforce my belief.

    It is convenient to forget that the government as a sizeable shareholder in both banks (assume 40% ownership) is exposed to massive upside potential as they recover.

    Finally in relation to the IMF. AIB has stress tested under pretty exterme conditions its future cashflow and capital position. Its endpoint in the captial depletion cycle is 3.4% core tier one. A sale of M&T stake would bring this back to over 4%. A buyback of hybrid capital securities could increase its core tier 1 by a further 1-2% Just food for thought in relation to its solvency. A lot of unknowns in potential future losses make it impossible to determine if it is insolvent. It is well above regulatory requirements without the govt. prefs at present.

  21. Brian J Goggin (bjg) Says:

    @Stuart Blythman: apologies for breaking this reply up: I pressed the button too soon.

    “Whoever runs the banks will have to be absolutely independent of political interference and be allowed to make decisions that are right for the bank. Again track records do not suggest this will be so. Banking is a business, if they try to run it as an arm of social policy or employment policy it will be a disaster.”

    That suggests that “political interference” is allowed to work in only one direction. Banks may influence government, as they do, but government (elected by the people) may not influence banks. And note that the bankers, running the banks as businesses, have already driven them to disaster. It is not clear how public servants could do any worse: I mean, what’s worse (for a business) than being bankrupt?

    “Transparancy will be vital. But again the governments track record on transparancy is very poor. At least a plc has to report to its shareholders what it is doing. If the banks are nationalised we’ll get nothing but the usual non interviews politicians appear to be programmed to give these days.”

    For public bodies, we have (a) political accountability and (b) the Freedom of Information Act. For plcs, we have a formulaic AGM at which the Board, backed by the institutional shareholders, may be slightly annoyed at having to listen to the moans of individual investors for a while, but never actually changes direction as a result. And bankers are every bit as good at stonewalling and bullshitting as politicians are, except that bankers get rewarded for it, rather than being fired by the people.

    bjg

    Finally their track record in selling off state assets (which the banks will be) is not a good one either. How is Eircom doing these days? Confidence of international investors to put money in when they got burnt (i.e lost all their money) before will be key. These banks are going to have to look pretty fantastic before anyone invests new money. Many foreign investors just won’t touch Ireland Inc again.

    Initially the people who pay for this will be Joe Public in their pension funds and savings which while fairly wiped out already, there is hope that there might be some gain later on. Nationalise and that hope is gone. I will be open - I do have a few shares, not enough to keep me awake but it will be like a second mini budget!”

  22. Brian J Goggin (bjg) Says:

    @Tadgh O Laighin: “The main Irish Banks have for many years been lauded throughout the world for their professional strategic and operational management.”

    The operation was a success but the patient died. The appropriate (world-class, leading-edge) processes were implemented within a total quality holistic perspective … but the banks are bankrupt. So those doing the lauding are not perhaps the best judges of strategic and operational management.

    “Yes major mistakes have been made over the past few years in terms of lending criteria —–common with rest of World—-but consider it unfair to now damn Bank Mgt as an “incompetent shower”.”

    I’m sure there are some — perhaps many — competent folk in the banks. All we need to take out are those who approved the loans to property developers and the bosses of those people. The competent remainder can remain.

    “The very postive results from major Banks in USA over the past week shows how quickly the tide can turn. As Padraig rightly points out that taking “a NOW ONLY” valuation off the assets is very onesided in taking a side in argument but in no way fair to all sides .”

    I have no interest in being fair to all sides. My interest is in avoiding risking numerous billions of bail-out borrowings that would be a millstone around my children’s necks. NAMA means the state has to pay out borrowed cash up front; nationalisation means it can value the assets appropriately (ie at about two pounds four shillings and thruppence three-farthings).

    bjg

  23. Karl Whelan Says:

    @Padraigh

    Surely we need to move beyond “the AMC worked” in Sweden as an argument for not nationalising some banks. The fact is that the government-sponsored AMCs only bought the bad assets of nationalised banks. That being the case, I just don’t see how you can use the Swedish experience of AMCs as an argument against nationalising banks and as a precedent for a Bacon-style NAMA.

    The issue of what fraction of the banking system the Swedes nationalised is, to my mind, not very relevant for us right now. It would be great if only 22% of our banking system was in big trouble. However, despite your (undoubtedly sincerely held) belief in the fundamental strength of our major banks, reports from Goodbodys, J.P. Morgan and others suggest incipient losses that will wipe out all Tier 1 equity capital and I’m more inclined to go with them.

  24. Brian J Goggin (bjg) Says:

    @Myles Duffy: “Does the Government really have the capacity to direct and control up to six extremely complex businesses and the necessary resources?”

    Since its foundation, less than 90 years ago, this state has successfully initiated and managed numerous complex businesses including banks (ACC, ICC), savings businesses (via the Post Office), an airline, an electricity generation and distribution business, a telecommunications business, public transport, an energy business and even a seaweed business. Some of these public sector businesses (notably the P&T telecoms business) ran into problems only when they were privatised. The state has a long and honourable history of making up for market imperfections.

    “The scale and complexity of this debacle is unprecedented as the collateral damage of The Great Famine, without the loss of life.” Not so. Consider The Emergency (aka World War 2). Not to mention the war of independence followed by the civil war. Against that background, what does the bankruptcy of a few banks matter?

    “If one, or more of these entites failed in nationalisation the current reputational damage would be componded without any secondary recourse.”

    Er, at least four of the six institutions have failed in private-sector ownership. The only reason they’re still around is that they haven’t recognised their losses yet.

    “To conclude, I think much debate is need to identufy the proverbial devil and associated detail before one could enjoy a sense of reassurance on nationalisation.”

    I don’t disagree with that. But the same applies to the NAMA proposal, except that it seems to be a much worse option.

    bjg

  25. Mark Coughlan Says:

    Hi Karl, first time poster here. A previous article (in the IT on 3rd April) of yours indicates that the banks could be nationalised and an asset management agency could then be established to take the impaired assets of the bank balance sheets.

    In yesterdays IT piece, there doesn’t appear to be much mention of the establishment of an asset management agency in the case of nationalisation. So, my question is, will the bad assets remain on the bank balance sheets or what, indeed, will happen to these assets in the case of nationalisation?

  26. Padraigh Griffin Says:

    Karl.

    My argument was that the asset management company worked in Sweden ‘irregardless of where the assets came from’. The cost to the taxpayer was minimal. Securum and Retriva produced as surplus. The AMC’s functioned and also it did not take as long as orginally planned. There is a feeling if they were more deliberate with the process , the returns would have been greater.

    This in tandem with the re-privatisation of Nordbanken (which included GOTA at this stage) meant that the cost was minimised.

    Yes. Nationalisation worked for the 2 banks that were taken into government ownership. They however had breached regulatory minimum capital levels at this stage. Have AIB and BOI (even without Government prefs? No, not even close.

    I, however think that you are missing my points.

    Firstly. The proportion of state control banking assets would be far too high if wholesale nationalisation was undertaken in Ireland. 22% was considered radical in Sweden. You are talking about nearly 100% control of an indigenous banking industry.

    Secondly, I believe that state stakes in banking instiutions would return better rewards for taxpayers than re-privatisation of a nationalised AIB, BOI, ANGLO, etc. with a lot less logistical effort and risk. This is the Norwegian approach. Their 60% shareholding in the banks (at height of ownership) could be mirrored here (100% Anglo + minority stakes in AIB and BOI, circa 40%). The upside economic reward for the taxpayer could be significant. This is a point you continously neglect in your publishings. The taxpayer as shareholders are exposed to the recovery to profit of the cleansed banks.

    I think the government acting within EU guidelines is trying something that picks the best bits of both Nordic experiences. This to me is a far better solution than outright nationalisation. Can you show me the examples of what you are suggesting (100% control of indigenous banking) was used and worked. Maybe then I will be convinced. Both Nordic examples worked to a certain extent. Combining best bits of both is cetainly a sounder and more well researched strategy then what you and some fellow economists are suggesting, when you make a plea for widesoread nationalisation.

  27. Karl Whelan Says:

    @Mark: The IT piece contained this: “Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

    However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter. The Swedish bad bank experience (widely mis-reported in this country) involved an asset valuation board that set the price for assets transferred from nationalised banks, but the process was not a controversial one.”

    So I was and still am in favour of an AMC, but after nationalisation.

    And a final comment on Sweden (at least in this thread). Securum and Retriva produced surpluses because they bought the bad assets at a very steep discount (Lundgren’s Congressional testimony discussed this) leaving the losses on the nationalised banks which then had to be re-capitalised by the state. If we applied these kind of discounts, they would wipe out the Tier 1 equity capital of the banks and since the state is the only investor, this would lead to natonalisation.

  28. colm mccarthy Says:

    It is important also, as I am sure Karl is aware, to note that the Swedish Treasury was on the line for no more than about 4.5% of GDP. The Irish govt has already invested this much: the Irish NAMA could easily involve four or five times this figure, more in a worst-case scenario. Given the already steep sovereign debt spread, minimising Exchequer exposure through avoidance of over-valuation of assets is even more critical in the Irish case.

  29. Derek Brawn Says:

    Nationalisation does not necessarily mean politicisation. It is possible to bring in Dutch/German/Swedish etc. bankers to consolidate & rationalise Irish banks post-nationalisation.

    Jan Kvarnstrom of Securum has already commented that NAMA in present guise is flawed. Do we want to see a 15-20yr NAMA fund operating as a REIT? Do we want the State to be the biggest Commercial & Residential property landlord?

    Regarding the earlier comment that prices will be higher in 3/4/5 years….they’re still falling. Plus it takes a +100% gain to counteract a -50% fall (principles of discounting & compounding appear lost to many people).

    Finally, with regard to Colm’s last comment the State has indeed already put 7 billion (4 billion NPRF + 3 billion bond issuance) into the two main banks, as well as supporting Anglo. Total Tier 1 Capital of the Irish banks presently stands at EUR 27 billion and this will likely be wiped out. Thus using Colm’s logic, the Irish Exchequer could be on the hook for 15-20% of GDP given that the latter is shrinking (i.e. total cost in region of 30 bn).

  30. Brian J Goggin (bjg) Says:

    @Derek Brawn: “Regarding the earlier comment that prices will be higher in 3/4/5 years….they’re still falling. Plus it takes a +100% gain to counteract a -50% fall (principles of discounting & compounding appear lost to many people).”

    Is there any reason to believe that there is an unmet demand for hotels, flats, offices, Shannonside holiday houses or whatever else was intended to be built on the property whereon the banks made loans? I don’t know much about the nature of that property, but it seems to me to be quite possible that it could be ten years before there is any additional demand. If NAMA goes ahead, the taxpayer could be paying interest over that period in order to maintain some very expensive surface carparks.

    bjg

  31. Derek Brawn Says:

    FAO Brian J, “Demand” is directly a function of Price so if the discount is big enough buyers should emerge. However this still depends on the availability of credit.

    There are many ways the State could boost demand e.g. copy the UK’s Self-Invested Personal Pensions (SIPPs) where Hotels & Commercial property may be owned personally and leased to one’s own business whereby the rental income then rolls-up tax-free in the SIPP.

    The Government could introduce an SSIA II specifically for individuals or collective investment trusts to invest in NAMA acquired property.

    International private equity could be enticed inwards to acquire these assets on a part-cash basis with the State providing Vendor-Loan-Financing (as opposed to issuing Govt Bonds to the Banks). These State IOUs could be issued to be used as eligible collateral for RePo at the ECB (cash essentially). This a potential solution that I hinted at on Radio 1 last Easter Monday on NAMA discussion with Brian Lucey.

    Basically, it just requires lateral thinking which I think is now occurring, but I fully accept your point that these surplus properties could end up in State ownership for a very long time (>10 years).

    What is worrying though is that Savills Group CEO Jeremy Helsby said in Sunday Business Post (Mar 29) that there is a ‘glut’ of residential and Commercial properties in Ireland undermining confidence. So unmet demand is a bit of an oxymoron. Sorry!

  32. karl deeter Says:

    the points being raised on nationalisation are taking the concept of somebody building a garden wall in another country and using it as the foundation of building a great wall of china here. The percentage of banking market share in this country by even three of the top institutions is over 2/3rds.

    I don’t think bank CEO’s are going to agree with NAMA, the point of value not being synchronised with tax payer interest is this:

    Why would a bank exec agree to sell an asset for less than they think they might get for it? it would be better left on the book if that is the case, and NAMA will becoming in looking for haircuts where they may not exist.

    therefore they will, by nature HAVE to pay more for the assets, losses will then be played down over 15 years (because the likelihood is that assets that do go across may result in losses).

    Nationalisation of itself may be an IMF piece of advise, but IMF is about IMF agendas, and in a market driven world the damage of wholesale nationalisation (Again, it won’t be 1/5th like in other countries) we will put increased pressure upon the state to carry the can, that will result in bonds being more expensive to raise, which in turn means more taxes so that we can clear the auctions and the spiral moves down.

    NAMA doesn’t have all the answers, but i certainly feel nationalisation has none.

    Tell me this: why is Anglo paying the highest deposit rates? Where did they suddenly get all the money from to do that? And to cover the extra 11bn of credit union money that went into them over the last quarter?

    I’d rather leave the market in place, its not about greed, its about utility.

  33. Lefournier Says:

    You may be interested in commentary from other websites.

    The Property Pin has a broadly supportive thread:
    http://www.thepropertypin.com/viewtopic.php?f=50&t=20837&hilit=nationalisation

    Politics.ie has a more critical thread entitled “What constitutes an academic exercise?” which includes several defences of the article, including mine.
    http://www.politics.ie/current-affairs/62128-what-constitutes-academic-exercise.html#post1583919

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