Sarah Carey on NAMA and Nationalisation

Sarah Carey’s article in today’s Irish Times is worth reading because it is perhaps the most articulate version yet of the key argument that tends to convince people that nationalisation is a bad idea and that NAMA and limited state ownership is the way to go.  The government has made a series of arguments against nationalisation but it’s hard for them to bluntly say “we don’t want to own the banks because we’re scared we’ll make a mess of them.”  But an opinion columnist can and this is the essence of Carey’s argument.

I think Sarah is too pessimistic about the long-term performance of semi-state bodies in Ireland and that, in any case, there’s little point in applying these analogies to businesses for which state ownership is an explicitly temporary measure. 

Beyond that, at the risk of making Sarah’s head hurt a bit more, let me put the case for why she should trust her instincts and support the college boys.

First, Sarah frames the debate as nationalisation versus NAMA.  However, both than 20 guys piece and my earlier four-point plan proposed that a NAMA-like vehicle be used in conjunction with nationalisation, so it is not accurate to say that “The academics want to nationalise the banks and the bureaucrats want Nama.” (Does anybody actually like the IT’s house style on acronyms?)

Second, she characterises the position of government officials as follows:

They argue that the key issue is not ownership but exposing the full extent of the problem. It’s more important to fess up about the writedown and get on with recapitalisation. Nama is a good stab at front loading that core problem.

But “fessing up” about the writedowns is exactly the opposite of the government’s current position.  They have stated that the two main banks only need €8.5 billion “under a severe stress scenario” but they can hardly believe that themselves—if that was the case, why bother setting up NAMA at all? 

The fact of the matter is that all realistic estimates show that the losses on property-related loans alone (even forgetting the upcoming losses on mortgages, business loans and credit cards) are going to wipe out the equity capital of the banks.

Third, and most important, this piece, like most other articles on this issue, contains no mention whatsoever of the potential long-run cost to the taxpayer of fixing the banks.  I think this stems from a common misunderstanding that somehow the cost is going to be the same no matter what we do (i.e. Baconian equivalence) and that nationalisation advocates are merely interested in wresting control away from evil bankers.  However, this is simply not the case.

Let’s suppose that NAMA does what Sarah says it should and gets the banks to fess up correctly that they’ve blown all their equity capital.  Then the government puts up all the funds to first get them back to solvency and then get them fully capitalised, a sum that could involve over €30 billion of taxpayer funds. 

What fraction of the equity in these taxpayer-capitalised (and profitable) banks does Sarah propose that the government hand over to the current shareholders of the banks? 60% appears to be the answer.  If the book value of the equity capital of these banks after re-capitalisation is, say, €25 billion, this would be a €15 billion gift to the shareholders who appointed and cheered on the management that created this mess in the first place.

In reality, there are two likely outcomes here.

  1. NAMA buys the bad assets for a fair price which (as Patrick Honohan has argued) would leave the government as large majority or sole shareholder.
  2. NAMA substantially overpays for the bad assets (leaving the taxpayer to pick up the tab) so that only a small amount of state equity investment is required.

Those who argue for NAMA and against substantial state ownership are arguing for the second outcome, whether they realise this or not.

15 thoughts on “Sarah Carey on NAMA and Nationalisation”

  1. I think Sarah hits the nail straight on the head —-well composed! There is a quantum leap between mindset of Civil Servants and those in commercial organisations. The former by nature of their roles and responsibilities have to be more conservative with ultra attention to minutest details ;for example, definition of URGENT is very different in commercial world. While not wanting to paint all those working as Civil Servants withe the same brush there is general perceptions on their perks and expectations and there is no doubt that following any Nationalisation of Banks there would be a segment of Bank staff looking for “privilege days” and more than adopting a non commercial mindset.

  2. Despite the force of the argumentation in favour of temporary nationalisation, for the foreseaable future, NAMA seems to be a “done deal”. The Government has invested too much political capital in this to contemplate a u-turn in the near future. And, as Sarah Carey’s piece implicitly suggests – and Karl has identified, the Government has cleverly used the public’s negative perception of its competence as an implicit positive support for NAMA that dare not say its name.

    The only possible hope for the salvation of tax payers is a Fianna Fail massacre on 5 June and a general election in early September. Bearing in mind, of course, that FG retains many doubts about nationalisation.

  3. I’d like to suggest another possibility for the government’s plan. By overpaying for the bad assets, NAMA will swap government debt directly with the banks and have to raise less debt through the markets. Could Ireland raise 30bn and its other debt requirements right now? This will keep the show running for a few more months.

    I suspect that Ireland has already gone Iceland. It’s just that the euro and the ECB has enabled us to raise debt for the time being. The NTMA just about got the last bond issue away and I’d question who did the buying. Perhaps it has ended up repo’d to the ECB via our banks. Appetite for Irish debt is low.

    I prefer the nationalisation option. Though I fear political interference in credit policies – almost to the degree that I’m against nationalisation 🙂

  4. I think Ahura may have raised a potentially huge issue in the second paragraph above.

    Could this be what’s now going on? :

    • The Irish Government borrows Euros by issuing Euro-denominated Irish government bonds.

    • The Irish Banks (whose continued existence has been at the pleasure of Minister Lenihan since the end of September last year) are significant (willing!) buyers of these bonds, i.e. they are now an (indispensibly?) significant lender of Euros to Lenihan?

    • The Irish Banks source the Euros to buy the bonds/make the loans to Lenihan, from the ECB in Frankfurt, using said bonds as ‘collateral’ for these Euros. So-called ongoing ‘repo transactions’ allow these bonds to remain at the ECB in return for the Euros, for as long as the bankers (and politicians?) in Frankfurt are prepared to indulge their fellow Euro-member to the west?

    • The net effect is that the c. Euro 40 billion that the Irish government remains determined to pay this year to the combination of public sector workers/pensioners/politicians and social welfare recipients is potentially being substantially secured from the ECB – our very own ‘lender of last resort’ – if this is the case, who needs the IMF (or the ‘goodwill’ of ‘International Markets/Lenders’)?

    • The further implication is that Ireland may continue to sustain our relatively extraordinary level of public sector and welfare remuneration into the indefinite future (depending on Merkel, Trichet et al).

    In effect, has our very own Euro ‘printing press’ been discovered in pristine working order by ‘The Magician of Merrion Street’?

  5. Many thanks to Ahura and John L in the last two posts. I think you have finally bottomed out the real reason for the Government’s opposition to temporary, selective nationalisation of the banks. Whether or not this symbiotic relationship and the associated convenient and indirect access to ECB funds will survive the equity injections that will make the Government a majority bank shareholder is a moot point. What are the odds that the NAMA write-downs and the associated equity injections will keep the Government’s shareholding below 50% and allow continued indirect access to the ECB cash dispenser?

  6. Karl
    Agree, but dont see need for a series of meetings/investigations over at least a week to approve the cashing of a 20euro cheque.

  7. I think it’s fair to say Sarah Carey’s piece is totally illogical and she doesn’t seem to realise the implication of her own argument. Her argument serves to protect the theft of taxpayers money at the expense of existing shareholder capital that should be written off against some of the losses. They took the risk after all. What she is arguing for is socialism for the rich.

  8. Today’s (19th August) piece by Sarah Cary in the Irish Times, is well constructed and very readable. It also redemptive. Though she may not like to admit it openly, the main thrust of the first section is exactly what Karl and I and others have said for a considerable time – better to nationalise and own (and thereby control credit inter alia) than subsidise and not own when it comes to the same cost anyway (see the relevant snippet below). Secondly, and in my view the 800 pound gorilla in the room, nationalising the two main banks prevents non-clawback. The government only promises to legislate for “levies” at some unspecified time should the state overpay for the loans, and has alreday put up excuses for not doing so. I believe it will never legislate to clawback, but only time will tell. (As an aside, it is lame to say that this leaves some unfortunate liability on the balance sheets of banks – it could be dealt with as a contingent liability). I have written to Mr. Lennihan to demand clawback in the primary legislation for the sake of all taxpayers, but had no response. Here’s what Sarah said today as she elegantly retreated;

    “Here’s where we appear to be: Nama is a good idea once we don’t over pay for the assets. Paying the right price will render the banks that are unofficially insolvent officially insolvent. This will necessitate recapitalisation on such a scale that nationalisation will be an automatic consequence. There is no way of not paying – at least €30 billion but possibly more – to get ourselves out of this mess. We have two options in how we spend that money.

    The first option requires us to write a cheque for €30 billion and use it to overpay for the banks’ troublesome assets. We will thus become the proud owners of some loans and the property on which they are secured.

    Option two involves writing one cheque for €15 billion for the loans and another one for another €15 billion which will make us the even prouder owner of some banks.

    In either case we’ve to borrow the money, presumably from the Germans, but under option two, we’d own more stuff. Owning stuff is good.”

  9. No problem admitting it! It took time. I was slow to be persuaded, but I am now officially onside 🙂 Go nationalisation, go!

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