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.
- 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.
- 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.