On Nationalisation

The debate on bank nationalisation on this site and elsewhere has been taking place at an impressively high level.    Owing to the efforts of Karl and others, we stand a much better chance of having a rational banking policy.   Yet I can’t help being puzzled at the depth and breadth of the support for nationalisation from so many leading economists.    I have no doubt that this support for the state ownership of such a critical sector of the economy is not a position easily come to.   What has led so many liberal-leaning economists to support nationalisation? 

As best I can read it, there is a huge fear of government failure at one level, and a relatively relaxed attitude to failure at another.   The driving fear – indeed prediction – is NAMA will significantly overpay for bank assets, imposing a potentially huge cost on taxpayers.    On the other hand, while advocates of nationalisation are well aware of the dangers of politicised credit allocation, I think it is fair to say they believe we can devise institutions that would allow arms-length control and speedy re-privatisation. 

I weigh the risks of these two forms of potential government failure differently.    On the overpayment risk, a critical achievement of the debate so far is to shine a searchlight on the danger.   With this danger firmly in mind, it should be possible to devise effective and transparent mechanisms for determining and paying expected value.   Innovative mechanisms – such as Patrick Honohan’s idea to combine lower direct payments with shares in NAMA – can help attenuate overpayment bias and reduce risk to the taxpayer.   Bottom line: I think this risk is manageable with due attention. 

I am more worried about the danger of a politicised credit system – even with politicians having the best of intentions going into their new roles.   On my reading, the international evidence on bank ownership and performance raises a huge cautionary flag.   (A good survey is:  William Megginson (2005), “The Economics of Bank Privatization,” Journal of Banking and Finance, 29, 1931-80; working paper version here).   While recognising that selective quotations do not prove a point, I think the following from another paper by Andrei Shleifer and co-authors gives a good sense of the danger:

A government can participate in the financing of firms in a variety of ways: it can provide subsidies directly, it can encourage private banks through regulation and suasion to lend to politically desirable projects, or it can own financial institutions, completely or partially, itself.   The advantage of owning banks–as opposed to regulating or owning all projects outright–is that ownership allows the government extensive control over the choice of projects bieng financed while leaving the implementation of these projects to the private sector. Ownership of banks thus promotes the government’s goals in both the “development” and “political” theories.

. . .

We find that higher government ownership of banks is associated with slower subsequent development of the finanical system, lower economic growth, and, in particular, lower growth of productivity.   These results, and particularly the finding of low productivity growth in countries with high government ownership of banks, are broadly supportive of the political view of the effects of government interference in markets (LaPorta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer (2002), “Government Ownership of Banks,” Journal of Finance, 57(1), 265-301).   

Perhaps paradoxically, the danger of politically directed lending is increased by the compelling rationale for a co-ordinated expansion in credit that nationalisation could facilitate.  Lucien Bebchuck and Itay Goldstein do a good job outlining the basic co-ordination failure and rationale for intervention.  The basic idea is that the creditworthiness of firms increases with a broad expansion in credit given interdependencies in the profitability of investment projects.   A coordinated credit expansion can then shift the economy from a bad (low creditworthiness, low credit) equilibrium to a good (high creditworthiness, high credit) equilibrium.   Nationalised banks would certainly be in a good position to solve the coordination problem.  But such directed lending is likely to be the thin end of the wedge to a more pervasive politician-directed credit allocation system.   I think the long-run costs would be lower with a coordinated expansion achieved through transparent fiscal instruments.  

The ease with which the government has come to direct the investment strategy of the National Pension Reserve Fund provides a useful warning.   As reported recently by the National Treasury Management Agency, investments “under the direction of the Minister for Finance” now account for 23.4 percent of the total fund (and that only includes investments in the preference shares of Bank of Ireland).  Here again there is a rationale for the government’s direction (though I believe it is a weak one given that international bond markets are still very much open for Irish debt).   But any semblance of arms-length governance is thoroughly shot – with as far as I can tell barely a whimper from economists. 

Two final brief points relating to majority government ownership (the most likely alternative to full nationalisation): 

First, in their Irish Times piece the proponents of nationalisation worry that the government would leave the banks undercapitalised under majority government ownership.    Under nationalisation, they see the government having a strong incentive to recapitalise the bank to maximise divestiture value.   However, given the government will eventually want to divest itself under both majority share ownership and nationalisation, I do not see why the incentive to recapitalise is weaker under the majority ownership option.  

Finally, it is reasonable to question whether the risk of politicisation is any less under majority government ownership than under full nationalisation.   However, a key focus of work on politicisation has been on cost to politicians in exercising control.    The transparency and governance institutions of a publicly traded company should make it more costly for politicians to direct the banks’ credit allocation for political ends.  

28 replies on “On Nationalisation”

The incentive to recapitalise is weaker under majority ownership due to the over-reliance on the State Guarantee for future contingent liabilities. Full nationalisation removes this inertia and creates a sense of immediacy. In other words, once complete nationalisation occurs the meter is running and new ordinary share capital is required to replace bondholders.

Total Capital Ratio includes not just Tier 1, but Upper Tier 2 (Senoir Sub) and Lower Tier 2 (Jnr Subord) as well as hybrid Tier 3. The “contingent claims” approach to credit states that:

Bank Bond = Long Treasury + Short Equity ‘PUT’ Option on Bank

The latter is costly under full nationalisation as debenture holders suffer losses. To encourage new debenture holders post-nationalisation requires an initial capital injection from the State.

This is why the State has not fully nationalised Anglo yet, but chooses to leave it as a going concern operating under the umbrella of State guarantee. It is the least costly solution and leaves Anglo undercapitalised but still operating at a much reduced capacity.

Finally, regarding politicisation – such a broad topic, but from a narrow perspective the State with minority ownership of the 2 largest Banks has already begun treating them like regulated utilities e.g. 12-month Repossession moratorium. In effect directing the Banks to do nothing about impaired non-performing loans. For publicly quoted listed companies.

This project is doomed, not as Parlon says, for want of expertize, but because there will be transparency via the courts and therefore not enough vig for our gombeens.
Some chance of success, but liquidation is certain…..and has an element of…..say it quietly lest others laugh!…..morality about it. SHAME! He mentions morality!

Thanks John for this contribution.

It is important to continue debating these issues. Let me summarise my disagreement under three headings.

1. Facing Reality: AIB and BOI have a combined €15 billion in core Tier 1 capital. Goodbodys suggest that their losses on property loans are €18.7 billion (other analysts have published similar estimates). And these figures do not represent the upcoming loan losses on residential loans, business loans, credit cards and the like. Loss estimates for other banks also point to shareholder equity being wiped out.

The government is the only willing potential investor ready to re-capitalise these banks. Nationalisation emerges from these figures as the obvious ownership structure, unless the government finds a way to overpay for the assets and, through this, reduce the dilution of equity for current shareholders.

2. Risk of Overpayment: John is hopeful that the government won’t overpay. But the government is perfectly aware of the figures cited above and yet insists the NAMA process can produce a well-capitalised banking system without nationalisation. This clearly signals they are getting ready to overpay.

Add in pressure from the stockbroking community, the banks (who should be in no position to negotiate but somehow are doing so anyway – I just heard Gerald Barry on RTE say the banks are holding all the cards in these negotiations!) and journalists (for example, McWilliams and Simon Carswell at the IT say that we need to overpay because otherwise, we’ll leave the banks undercapitalised ….) and the risks of over-paying are very real.

If we overpay by 20% on €90 billion of loans, that would be €18 billion. You would have to believe that the temporarily nationalised banks were going to make enormous quantities of bad loans to be willing to overpay by this extent in order to keep the current shareholders still involved in running the banks.

3. Politicisation: I do not have a relaxed attitude to this problem nor would I imagine do the other signees. However, I would characterise this problem exactly as John characterised the risk of overpayment—this risk is manageable with due attention. Getting the mandate, management, and oversight structures right will be of great importance. The references John provided are valuable but they largely function as warnings against permanent nationalisation, which is not what our article was arguing for.

Let me again 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.”

The main reason for government getting involved in any form af bail-out of banks is to ensure that credit is made available to Irish business. Would it not be cheaper to develop a state-owned bank to do precisely this? After all ICC and ACC were originlly set up as state banks to provide credit to Irish businesses, agri-business and farmers when the commerical banks were unwilling or unable to do it. How much capital would such a bank need? Twenty billion would go a long way, I would think. That is much less than the cost of NAMA and the recapitalisation of AIB and Bank of Ireland.

Why not set up such a state-owned bank, abandon any plans for rescuing other banks via NAMA or any other mechanism, and let the markets deal with the bad debts. Do not renew the wide-ranging guarantee of all loans made to commercial banks at the end of the two year period; confine all fututre guarantees to depositors. Obviously, no announcement of this policy should be made until the guarantee has expired, otherwise the guaranteed banks would collapse prematurely.

The best policy might be use the already nationalised Anglo-Irish Bank to quietly expand its lending to Irish business, injecting capital as required. It would probably be necessary to create a wider network of branches for this bank to be accessible for small business.

To avoid any obvious political climbdown in respect of NAMA, and to avoid giving the premature impression that the state is abandoning the private sector banks, NAMA could be used initially to deal with the bad loans of Anglo-Irish Bank. This could be portrayed as a necessary “pilot scheme” to prepare NAMA for wider take over of bad loans. In the meantime, NAMA could co-operate with private sector organisations (e.g. Mallabraca) in relation to the disposal of Anglo-Irish Bank’s bad loans or the properties that backed them.

In the end, the private sector is the best vehicle for managing the bad loans of any bank. If they can only be sold off at prices that leave the existing commercial banks under-capitalised, so be it. Those banks can become zombie banks until they get their capital-loan ratios right. The state’s own bank can take up the slack by lending to Irish business, and make profits doing so. If the commercial banks need state capital to repay loan notes that fall due, the state can provide this capital in exchange for equity. If some of the commercial banks fail, the state can then nationalise them to protect depositors, but only as a last resort.

Basically, we need to limit the state’s exposure to this problem. Filling the credit gap through wider lending from a state bank seems a much cheaper solution than trying to shore up every bank in the system. A similar approach could be taken to the housing mortgage market, but given the low demand for mortgages at present, this may not prove necessary.

The politicisation of lending decisions is a bit of a moot point in my opinion.

With most of the significant loans transferred to NAMA the risk of politicisation is already there and will have to be managed.
If it can be managed with the most contenious and political difficult loans, those to developers, surely we can put controls in place to manage the risk of politicisation the rest of the banks.

Agree with the point that politicisation may be mitigated by using an arms-length approach.

With regard to David’s point re. NewBank – this idea has been mentioned before and although in theory it makes perfect sense, the abandonment of the other publicly quoted Irish Banks would set an awkward precedent that would make it impossible for NewBank to raise international capital. Foreign ownership of AIB & BkIR was estimated at in excess of 60% just a year ago. These same institutional investors would be burnt and they would not want to buy even Irish Government Bonds in the future.

Appreciate the sentiment regarding limiting the State exposure, but ‘moral hazard’ has already been vindicated.


Whom do you guys think will be able to pay for the ‘bail-outs’. If national income is declining (ie, we are in a deflation situation) and the amount of debt is increasing – HOW will we, the taxpayer pay?? Monopoly money??

This ‘debate’ about nationalization is a profoundly distracting business. The banks are insolvent – QED. Let them fold, and set up three new, taxpayer-backed banks (commercial, retail and a savings-and-loan). The taxpayer will still have to fork out, but only once!

The ‘western’ economies are experiencing a profound ‘supply’ shock and will not be able to begin to recover until the reasons for the shock have receded, which will not be for a very long period. The two century era of Permagrowth is at an end. You had better conjure up a new economic model.

The proposal to re-capitalize our banks or to create a special purpose vehicle for the un-recoverable debts is insane – but will go ahead!! Successful Failures are always pursued until they become even greater successes!!

You would be better advised to turn your attention to the provision of a Debt Jubilee for the thousands of our citizens who will be destitute when this deflation spiral flares out.

Bye-the-bye. Keep a close eye on energy prices!

Brian P

The simple arithmetic is that the banks have hidden loan losses greater than equity capital so are effectively insolvent when the loan losses are correctly recognized at true value. Nationalization is the much lower-cost alternative to abig subsidy to existing equity holders with the same effect (as Karl Whelan has shown so convincingly on this blog). The Irish government cannot afford the subsidy (it can barely afford to bail out the banks in any case).

The big risk of nationalization (or at least one of the big risks) is that the government will not push hard to collect from the property developers who financed most of the their election campaigns over the last decade and a half, and constitute the obliged party for most of the bad loans. NAMA or some similar institution needs to remain in place, to give arms length between the government and bank management, and to prevent an extremely costly payback to property developers for their role as large political donors.

Thanks to all for taking the time to respond. A few comments . . .

Each of your points is well taken. I want to avoid getting locked into an anti-nationalisation position and I’m certainly open to conversion. But I’m not there yet, so let me push back a little.

On facing reality, I accept the banks are very likely to be insolvent based on actual market values and that the government is the only feasible source of recapitalisation. The choice, then, is between full nationalisation and substantial government equity investments (most likely leading to majority government ownership). Sometimes it seems you are lumping these two options together. I think either model can involve facing up to reality of effective insolvency. While we can’t be sure how either would work out in practice, I would hold out more hope for arms-length governance and timely divestiture under the publicly traded model.

On the risk of overpaying, I think it is again important to stress that the alternative to nationalisation is asset purchases at fair price plus government equity injections to yield adequately capitalised banks. I don’t see how the need to recapitalise inevitably leads to overpayment, but I absolutely agree that extreme vigilance is required. I also don’t see how the banks are in the driver’s seat. Unlike the banks’ veto power that in hampering resolution in the U.S., my understanding is that the Irish government is in a position to dictate what assets are transferred and the prices for those transfers. Provided it is willing to make the necessary equity injections — this point yet again — it is in a strong position to impose the required haircut.

On politicisation, I worry that too strong a lesson is being learned from the successful Swedish experience. Colm McCarthy has drawn attention to the massive difference is scale (as a share of GDP) involved. Moreover, while I would certainly not say that Ireland has weak institutions, Sweden comes near the top in any ranking I have seen of institutional quality. Some scepticism is warranted.

Another reason I worry about politicisation under full nationalisation is that there is an undeniable change in zeitgeist relating to the role of government in the economy. While the pendulum surely did swing too far towards financial deregulation, I think there is a big danger it will swing too far back, leaving politicians less ideologically constrained in directing the lending of the banks, and under weak pressure to turn ownership and control back to the private sector. I fear a nationalisation “ratchet.”

@Derek and Dreaded_Estate
I agree that politicisation is an issue under both full nationalisation and the majority ownership model. But I see the governance structures as being quite different under these too models. While I am under no illusions about the risk of interference under majority ownership, politicans won’t have their hands so directly on the levers of control.

In considering the two models, I take the existence of NAMA as a given, and with it such risks as “evergreening” accounts for political purposes. Great attention must be paid to the governance arrangments for NAMA, but my focus here is more on the relative risks of politicisation of new credit flows in the surviving banks.

With the guarantee in place, I don’t see how we have the luxury of letting the existing banks fail. Even without the guarantee, Ireland could easily find itself with a yet more dysfunctional banking system if it carelessly destroyed existing organisational capital.

Having said that, if it is concluded that a “development” bank is needed to direct credit as part of a national economic strategy, I think it would be better to introduce it as a separate entity without a confused commercial/development mandate. I think it is best if BOI and AIB remain commerically oriented entities (whatever their ownership structure).

Sorry, Greg, I missed your comment when responding before.

I absolutely agree that a subsidy should be avoided. But I don’t see why full nationalisation is the only way to do so. Paying fair value for the assets combined with a market-based dilution of existing owners as part of an equity-based recapitalisation could in principle achieve three necessary goals: (i) an asset management agency to manage the debts of the developers; (ii) avoidance of any subsidy to the existing owners; and (iii) the creation of adequately capitalised (but admittedly majority government owned) banks.

Has there been any analysis of how the lower tiers of the banks financing could take some of the loses from bad debts?

How much sub-ordinated debt and hybrid equity exists in the banks?
How much of this is not guaranteed?
And how could it be used to absorb loses from bad debts?

Perhaps we need to look at a community banking system, on a national level having banks that are ‘too big to fail’ may be a mistake.

I think sometimes people think about this in purely academic terms though and there is a risk to this: if the market models didn’t work then who is to say that academic ones will? (that’s not a slight, merely a point)

we actually NEED the market in order to see how the bank is doing because it is the best interpreter available, and if full state ownership takes over the shutters come down, the only way of doing this is to avoid full nationalisation.

I don’t say it as well as John McH but I’m on the same page!

In really simple terms, we have to overpay, then carry the burden and the loss, which then gets put back on the banks to pay off with interest over a number of years, that’s the real end game, let the banks lose but the carnage occurs in NAMA not on their balance sheet, then they pay the money back over time and that way they can keep cashflow and banking alive in the interim. I really don’t see the taxpayer benefit and solutions as being at all in alignment, thus one or the other has to carry the burden, and if we want the banks operational it kind of narrows down the odds as to who it will be.

@ David Buttimer
Agreed. The market will fill the void, once the malinvestments are liquidated. The faster the better. Government support is unaffordable and damages the investment climate particularly when it is corrupt!

@ Brian Woods
You have put it into words, Thank you!

Please see this chart how accurate it may be is impossible to gauge but it is frightening:


This enabled many to see what was the real bubble but despite this it went on and on. Us data, but the upshot is that we will be unable to depend on the US for any stimulus, once their current round fails.
Comments anyone?

@James. The point about sub-ordinate debt is an important one. Unfortunately it too falls under the banking guarantee, and also unfortunately there appears to be lots of it.

There is a lingering question for me about how the banks were allowed fund their balance sheet growth through debt securities rather than through deposit growth. (I know, writing this, that hindsight is 20:20)
The BOI Sept 2008 interim balance sheet shows €90bn of customer deposits and €60bn of debt securities issued, with loans and advances to customers of €144bn.
Compare these figure to the 2000 balance sheet, where loans to customers amount to €44bn, with deposits at €40bn and debt securities only at €2.8bn.
I’m using BOI figures because they are to hand, things were no better at the other institutions. But my point is that the funding model of the banks obviously changed over the years, and as this model changed the banks risk exposure changed.
Instead of being solely exposed to the risk of customer default, they also became exposed to the extra risk of their funding model breaking down. This extra risk does not seem to have been either understood or accounted for.

So what does all this have to do with nationalisation? I think it is central to the argument because the debt securities raised by the banks are used to fund their lending. We rightly want functioning banking institutions because without available credit the crash will get a lot crashier. But because the banks have chosen the funding method outlined above, most of which is are short term bonds, the amount of future credit that will become available will be curtailed by the reduction in the market for such bonds.
As this unwinds, any pretense that an independent bank will be anything other than a zombie bank will disappear.

The Financial Times Market’s blog (alphaville) suggested, rather tongue in cheek, that the article in last Friday’s IT could have been written by a group of ‘raging Bolsheviks’. But these are desperate times for our banks and, rather like truth in wartime, maybe ideology may have to be the first victim of this crisis.

NAMA is here to stay, so the debate has moved onto nationalisation. And full nationalisation has to happen. Without it we will have zombie banks who will be unable to lend.

@ Derek Brawn
What international funding is that? We will be unable to find any as the OECD shut down tax havens and we keep bein mentioned and compared with Iceland. Start small, like Iceland and the international fly by night money, much reduced, will come. There are large pools that could be recovered by tax authorities, if permitted to do so by government managers across the OECD.

@ Karl Deeter
We have community banking. The building society and the larger credit unions may provide credit for small business. Large business will be self funded or not attracted to Ireland as a base. They situate here because of our employee skills and tax rates. Not because of our internationally funded banks?

@ Lorcan RK
Government guarantees are like legitimate expectations. A few mentions in the local media and no one is surprized when all of a sudden, the guarantee is limited to domestic investors when it is clear tha needs must. There are two sides to corruption: looking after our own always comes first. It is just that I like to be considered “one of us” and share in the spoils. Now with enough hardship to go around, we can all expect to share! Whoopee! I’m on the inside of the cactus!

@ James
A lot of this money is grey or even black. It belongs to business partners of the bank and is designed to launder assets and avoid tax see an earlier post of mine, uncontradicted as yet. It is not merely, sticky, it will follow the customer if it can be prised from the grasp of the bank. It is an issue that requires the greatest scrutiny. AngIB will perhaps provide some examples, if the CAB officers being consulted have the expertize.
They would have had, a few years ago, but perhaps they are all jumping ship before the terminal gratuity is taxed! Most Inspectors of taxes (fully trained) are in their fifties.
The Fraud Squad, GBFI, may be up to it also. But with the use of “foreign” banks situated in the Caymans etc, then they may find it a smoking gun seen through a glass darkly….. the darker the better perhaps, to preserve capital in private hands which may get back into circulation in Ireland, rather than end up in the hands of the FF led government.

Coming over from the Krugman blog with high expectations, I was somewhat disappointed to find John McHale saying:

“Bottom line: I think this risk [the risk of materially overpaying for toxic assets under NAMA, or presumably in the U.S. case, PPIP] is manageable with due attention.”

By coincidence I have been reading Thucydides, 1.84, and it strikes me that he – or in this case Archidamus, the Spartan King who is arguing against too hasty an entry by Sparta against Athens into what became the 27 year Peloponnesian War – provides the appropriate perspective on Mr. McHale’s comment.

Archidamus, in typical laconic fashion, notes (and I freely translate):

“There are those who are too clever by half in disparaging in pretty words their enemies’ military preparations, and then blow it in deeds when push comes to shove on the battlefield.”

I have no particularly informed opinion about NAMA, but I do regard McHale’s comments as somewhere between naïve and fatuous if they are meant to apply at all to PPIP – and its coming epicycles. If he has an entirely opposite opinion on the issue of overpaying for toxic assets about PPIP from the one he apparently holds about NAMA, then he should ignore these remarks and imagine that I am addressing them to a different John McHale, a naïf embedded perhaps somewhere deep in the bowels of the U.S. Treasury on the other side of the pond.

The point is that we have an almost unbroken record of – now – two U.S. administrations bending over and holding their ankles – or that would be the taxpayers’ ankles — for the bankers. From the billions that Hank Paulson enabled AIG to quietly shovel at 100% of value to the banks for their toxic CDSs assets, including $13b to his – and Edward Liddy’s — Alma Mater, Goldman Sachs, to the AIG and other executive bonuses, to the sweetheart deals on Wachovia, Merrill Lynch, Citibank here, Citibank there, including Vikram Pandit’s $10m chump change makeover of his shabby headquarters at taxpayer expense ….

And the list of depredations goes on and on and on.

Why on earth, based on the evidence to date, would we ever think that a Timothy Geithner and Lawrence Summers managed PPIP – TARP, TALF, or whatever — response to banks would turn into anything but a ongoing looting party?

Pretty (kalōs) words, John, but an entirely different (anomoiōs) reality.

Note, by the way, the apparent latest bit of legerdemain by Treasury as reported in today’s New York Times here: a proposal to take more equity in the banks so as to avoid going to Congress to ask for more money.

This might appear to some to be a step towards nationalization. But what would you say, based upon past history, the odds are that the bankers, and not the U.S. government, will still retain all the control and the ability to call the shots – including especially on executive pay, where the banks will then not be so much under the constraints of some inconvenient piece of Congressional legislation? That the will and the way will be there to pay “due attention” to these foxes still loose in the chicken coop?

Even shorter than those saying Susan Boyle wins Britain’s Got Talent.

Get your head out of the pretty clouds, John. Really nationalize ’em. And be sure to fire the “irreplaceable best and brightest” who created the mess in the first place. Otherwise, as has already been documented in spades on the Internet, they are about to flim flam us — again.

There are obvious risks involved in nationalisation, but the examples cited from the quote do not frighten me greatly.
“Slower development of the financial system?” Isn’t that a circular argument? ” We need a large privately owned financial system so that we will have a large privately-owned financial system.”
Maybe the growth of the financial system is a BAd thing, not a good one.
Recently I checked back on writings in late 2006 to see if economists had predicted the coming crisis. Taking the Brookings Economic Papers as a typical samllpe, the edition p[ublishged for H2 DID have something on the financial syystem. It said that China would be held back by it’s failure to move wholeheartedly to the US financial and banking model. China does not look to be suffering too much from that now.
And as to the point that nationalisation cuts productivity, as Krugman recently pointed out, lots of the US productivity gains in recent years come from productivity WITHIN the financial sector, the measures of which now look highly questionable.

@pat donnelly: i would be more concerned about enterprise level funding which is purely down to banks for the most part in Ireland, and as enterprise is the largest employer in the country then it is they and not large business that must rely on the credit flow being available.

Community banking in its truest sense provide all banking services but within a local catchment area, I don’t think credit unions stack up in that sense and building societies, while far removed from their original purpose, are in the same trench as banks, the lines between them are too blurred to draw distinction any more.

Our skills and tax base continue to be a strength, and true, banks are not the reason for locating here, but the two are intertwined, if banks are the point of systemic risk then locating here isn’t attractive because it puts uncertainty on many of the reasons a person would move a company here.

will low corporation tax remain? will the skill base be available in the long term if we have to cut education spending? will the infrastructure be up to date and advancing? These are all valid concerns and thus one, while not being directly related, does rely on the other.

Many of the Credit Unions have been restricted from business lending because it is those, rather than member loans, that have been crucifying their loan books. Looking to them to be a vector for credit to SMBs is fanciful in the near term when they are being obligated by the Regulator to return to first principles – small loans to families backed by a history of good credit and savings in the institution.

I’m no economist. I have a BA in Economics and Politics and I’ve worked in a US stockbrokers for a number of years. A couple of questions for the 20 economists for whom I have the greatest of respect, so please I’m not having a go at anybody and I may even show myself as a right eejit.

I’m not sure “the 20″ have made the argument for nationalisation. It seems to me the key issue is ‘to keep the banks well or adequately capitalised”. NAMA and nationalisation are only means to doing this and and are not ends in themselves. There will be much conflict over the pricing of the assets whether the banks are nationalised or not, as the developer/owners will also be upset at the transfer of ownership. After all the money is poured into the banks, in the long long term we could see a venture capital company taking over the banks and stripping the assets, another Eircom debacle. Large tracts of the Taoiseach’s constituency are still “broadband FREE”.

Karl Whelan says overpayment by 20% could cost €18 billion, but that seems to me to be a mad figure. You have to assume a discounted figure from the 90 billion, say 30%, so the 20% overpayment would be on the discounted figure of 60 billion and so 12 instead of 18 billion. Shure what’s a billion here or there?

I’m not sure how anybody could get to a “fair value” or “market value” and there will be incredible disagreement from all sides.

I worked in Compliance during the ’87 crash and it was my first clash with negative equity – as most Americans bought shares on Margin and they ended up owing more than their shares were worth. Of course, the smallprint said the stockbroker could sell the stock at any time if the equity in the account fell below a certain percentage – 30%, I think.

I think the Government has the power to change management without nationalisation (reputation) and I think transparency can be dealt with if the will is there. Our biggest issue is the “culture of business” and the legal blockades which will be thrown up at every turn and I would have much concern on who knows who and the disregard for ethical business norms of behaviour.

@Pat Cooper: The issue about nationalisation is not solely a money issue or capital, the Irish banks are now poorly perceived (as risky) by investors hence the low stock price – a fraction of book value. The government does not have the power to change staff directly, although with fresh equity capital injections they certainly have leverage.

The developers’ have no choice re. change of ownership – they’re in default on their interest/capital repayments i.e. these loans are already negative amortization loans (growing by the week).

Regarding the asset-stripping notion by a private equity form or VC fund, the purchase of a bank has to be approved by the Monopolies commission so very unlikely. Plus the Central Bank would/could revoke the banking license.

Fair value is determined by what someone is willing to pay. The present debate in Ireland centers around 2 mutually exclusive ideas: (1) that these assets cannot be valued and weak estimates as low as 15 cents on the euro have been mentioned, as well as (2) vulture private equity funds are waiting to pick up these properties at fire-sale prices. These two points directly contradict each other. It’s like saying that a reserve price on Ebay of Zero will result in No Sale! Trust me, I know of funds that are already examining part-finished apartment complexes.

The biggest factor that is being overlooked by many – especially those closest to the government – is that some degree of urgency is required. As you are no doubt aware, the stock market likes bad news now up front and digests it quickly: hence the addage “Sell on the Rumour, Buy on the Story”.

Temporary nationalisation provides a clean slate solution to clean-up the Banks both finacially as well as reputationally. It also boosts the State’s credibility too, important as the State borrows in the same international debt capital markets off the same ‘real-money’ investors (Pension Funds, Life Assurance, Insurance Companies, Central Banks etc.)

@Derek I think the government is in a pretty powerful position. It seems to me that the bankers are simply cleverer (I don’t mean better or more intelligent) than the government. If the banks won’t play ball the the gov takes 51% equity. Poorly perceived and reputation can be handled by change of management; it’s not an argument for nationalisation.

The developers may have no choice but that doesn’t mean there won’t be a lot of grandstanding. You can use the same argument to say the banks don’t have a choice; technically they’re almost insolvent. Funds looking for bargains will try to run the “fair value” down even more than is justified. Oh, but that’s the wonderful market at its best. I’m completely amazed at how so many people don’t even question the ‘market concept’ considering how it has so completely failed. Speculators hop in to take advantage of every crisis situation and that is accepted as fine, good. It’s the market. It’s how we do things. How about that change of culture?

If we’re heading into 10 years of recession, how long can the government keep the bank. I just think the argument for nationalisation hasn’t been made. The “clean slate” argument doesn’t depend on full nationalisation. I would be concerned about politicisation.

The whole scenario is hilarious. Having worked in Compliance I’ve been banging on about Irish banks for years and being told I was an idiot. ‘That’s how things are done’ was the favourite response. Also, the international money markets are simply taking advantage of a crisis situation. CAn you imagine if we had an independent currency?

“On facing reality, I accept the banks are very likely to be insolvent based on actual market values and that the government is the only feasible source of recapitalisation. The choice, then, is between full nationalisation and substantial government equity investments (most likely leading to majority government ownership). Sometimes it seems you are lumping these two options together. I think either model can involve facing up to reality of effective insolvency”

If the banks share capital is completely lost (and all debt liabilities are to be met) then how can anything but total ownership of the banks be anything other then overpaying.


I am assuming that even if the banks are insolvent in expected value terms, their shares still have some (small) positive value due the “put option” of limited liability. Under uncertainty, all that is needed is positive net value in some states to generate a positive share price.

Comments are closed.